COVID-19-related rent concessions under UK GAAP: proposed simplification

29 July: The Financial Reporting Council has proposed changes to FRS 102 and FRS 105 which would specify the accounting treatment for changes in operating lease payments arising from certain COVID-19-related rent concessions. ICAEW’s Financial Reporting Faculty explains the proposals in more detail below.

Why is change needed?

During the coronavirus pandemic, many UK entities will receive rent concessions from their landlords: for example, rent holidays for all or part of their rent payments over an agreed period of time. The Financial Reporting Council (FRC) has noted that different views are emerging as to how to account for such arrangements, primarily in relation to operating lease agreements. As a result, the FRC has proposed changes to FRS 102 and FRS 105 to reduce uncertainty around the accounting treatment, with a view to achieving greater consistency and comparability in reported results.

What is being proposed?

The FRC is proposing to require lessees to recognise changes in operating lease payments that arise from COVID-19-related rent concessions over the periods that the change in lease payments is intended to compensate. This same requirement would apply to lessors in respect to changes in lease income arising from COVID-19-related rent concessions.

The requirement would only apply to rent concessions occurring as a direct consequence of the COVID-19 pandemic and meeting all the following conditions:

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.

Lessees that have recognised lease payments in accordance with the new requirement would be required to disclose details of the change in their accounts. Small entities applying FRS 102 Section 1A Small Entities would be required to disclose this information only if necessary to give a true and fair view.

Apart from the disclosure requirements, the proposed amendments to FRS 102 and FRS 105 are the same.

What does this mean in practice?

An entity that receives a rent concession directly as a consequence of COVID-19 and that meets conditions set out in the standard will recognise the benefit of the reduced rent at the same time that it receives the concession, as opposed to spreading the benefit of the reduced rent over the remainder of the lease term.

It is worth noting that a deferral of rent payments which does not change the consideration for the lease but only the timing of individual payments under an operating lease would not meet the criteria for the new requirement. In this instance, rent payments that would ordinarily be due would continue to be recognised and accrued.

When would the changes come into effect?

It is proposed that the amendments would be effective for accounting periods beginning on or after 1 January 2020, with early application permitted.

What happens next?

ICAEW will be responding to the FRC’s proposals and will monitor developments and the need for further guidance for members. If you have any views on the proposals that you’d like to share with ICAEW, please send these to frfac@icaew.com.

For more information on the impact of COVID-19 on UK GAAP Accounts click here.