The FRC has finalised amendments to FRS 102 and FRS 105 in respect of Covid-19 related rent concessions. The amendments are mandatory and apply to periods beginning 1 January 2020, although early application is permitted.
Which entities are the amendments relevant to?
The amendments apply to the recognition of lease payments and lease income from operating lease agreements.
Although concerns about the treatment of forgiven lease payments were raised predominantly from the perspective of lessees, the FRC decided that, because of similarities between the relevant recognition requirements of FRS 102 for lessees and lessors, the accounting for both should be addressed. This is a key difference compared with the amendments the IASB made to IFRS 16, which do not provide any relief to lessors.
No amendments have been made for changes in lease payments for finance leases, to which the requirements of Section 11 Basic Financial Instruments and Section 20 Leases of FRS 102 apply.
Which rent concessions do the amendments apply to?
The amendments apply to temporary rent concessions as a direct consequence of the Covid-19 pandemic if, and only if, all of the following conditions are met:
- The change in lease payments results in revised consideration for the lease that is less than the consideration for the lease immediately preceding the change
- Any reduction in lease payments affects only payments originally due on or before 30 June 2021, and
- There is no significant change to other terms and conditions of the lease.
Where lease payments are deferred (for example, where lease payments due in April-June 2020 instead become payable in full in June 2021), the total consideration payable in respect of the lease is unchanged. The amendments do not, therefore, apply and the existing requirements of FRS 102 must be followed. Generally, this will result in the lease payments being straight lined over the lease term.
If the conditions are met, how does a lessee account for a rent concession under FRS 102?
The amendments require a lessee to recognise any change in lease payments arising from qualifying rent concessions over the period that the change in lease payments is intended to compensate. For example, if a lessee is offered a rent holiday such that the rent due for March 2020 to June 2020 is waived, the lessee would recognise no lease expense during that period.
The lessee will also need to disclose the change in lease payments recognised in profit or loss in accordance with the amendments, unless the entity is a small entity applying Section 1A of FRS 102, in which case such a disclosure is recommended.
If the conditions are met, how does a lessor account for a rent concession under FRS 102
Again, the amendments require a lessor to recognise any change in lease income arising from qualifying rent concessions over the periods that the change in lease payments is intended to compensate. Following the same simple example, where a lessor offers a lessee a rent holiday such that rent due for March 2020 to June 2020 is waived, the lessor would recognise no lease income during that period.
No specific disclosure requirement has been added for lessors, but FRS 102 already requires lessors to provide a general description of their significant leasing arrangements. The FRC expects information about rent concessions granted would be included within the ‘Basis of Conclusions’.
Lessors who grant concessions should remember that new arrangements may trigger VAT issues – read more here.
Subsequent amendments
In June 2021 the FRC issued further amendments to FRS 102 and FRS 105 to extend the application of requirements that cover the accounting treatment of temporary rent concessions occurring as a direct consequence of the Covid-19 pandemic by one year.
The requirements, originally introduced into FRS 102 and FRS 105 in October 2020, apply to rent concessions that reduce only lease payments originally due on or before 30 June 2022 (previously 30 June 2021), provided the other conditions for applying the requirements are met.
The amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted.