COVID-19-related rent concession under FRS 102 and FRS 105

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members preparing financial statements under FRS 102 and FRS 105 to account for operating leases for which covid-19-related rent concessions have been granted.

Members may also wish to refer to the following related helpsheets guidance:

• Accounting for leases under FRS 102
• What is the lease term?
• How does a lessee account for a rent free period under FRS 102?

In October 2020, the FRC introduced amendments to FRS 102 and FRS 105 to address concerns about how the relevant requirements of FRS 102 and FRS 105 should be applied to temporary rent concessions granted in response to the COVID-19 pandemic. In June 2021 a further amendment was issued to extend the period of application.

The amendments require entities to recognise changes in operating lease payments that occur as a direct consequence of the COVID-19 pandemic, and meet specified conditions, on a systematic basis over the periods the change in lease payments is intended to compensate.

The original amendments are effective for accounting periods beginning on or after 1 January 2020. The subsequent amendments are effective for accounting periods beginning on or after 1 January 2021. Early adoption is permitted in both cases, and most entities are expected to early adopt (not least because it will prevent prior year adjustments being required in the following year’s accounts).

The new accounting requirements apply to rent concessions occurring as a direct consequence of the COVID-19 pandemic if, and only if, all of the following conditions are met: 

(a) 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;
(b) Any reduction in lease payments affects only payments originally due on or before 30 June 2022; and
(c) There is no significant change to other terms and conditions of the lease.

(FRS 102 paragraph 20.15D or FRS 105 paragraph 15.16B)

Note: condition (b) originally read: “any reduction in lease payments affects only payments originally due on or before 30 June 2021”
This period was extended by the amendments published in June 2021 and the change applies to periods commencing on or after 1 January 2021, but early adoption is permitted.

Further notes on each of these is set out in the following subheadings.

This condition will not be met where rental payments are simply deferred. This is because a deferral in rent payments does not result in reduced consideration for the lease, it merely changes the timing of the payments.

Under the original amendment, if reductions in lease payments extend beyond 30 June 2021, the rent concession in its entirety would not meet this condition. The changes made in June 2021 mean rent reductions extending to 30 June 2022, but not beyond, can be eligible for the new accounting requirements for period commencing on or after 1 January 2021 (with early adoption permitted).

For example, a reduction in rent each month for 24 months from March 2020, would not meet the original condition, as some of the reductions in lease payments extend beyond 30 June 2021. However, as the reduction ceases before 30 June 2022 this example would meet the conditions under the new amendment.

A reduction in rent each month for 36 months from March 2020, would not meet the original or new conditions as some of the reductions in lease payments extend beyond 30 June 2022 so the new accounting requirements would not be applied to this reduction in rent.

A concession that incorporates significant changes to a lease agreement which are unrelated to the COVID-19 pandemic, but negotiated at the same time as the rent concession, would not meet this condition. Professional judgement will be required on how significant other changes are.

A lessee is required to recognise any change in lease payments arising from rent concessions that meet the criteria (see Which concessions do the amendments apply to?) on a systematic basis over the periods that the change in lease payments is intended to compensate (FRS 102 paragraph 20.15C or FRS 105 paragraph 15.16A).

A lessee reporting under FRS 102 is required to disclose the amount of the change in lease payments recognised in profit or loss in accordance with the above requirement (FRS 102 paragraph 20.16(c)). Such a disclosure is not mandatory under FRS 102 1A or FRS 105 (although those reporting under FRS 102 1A need to consider whether disclosure is necessary to achieve a true and fair view).

A lessee is currently 2 years into a 5 year lease agreement for a shop and is required to pay £10,000 per calendar month (there was no lease incentive). The shop was closed due to COVID-19 between 23 March 2020 and 14 June 2020 inclusive. 

In April 2020, the landlord agrees to a COVID-19-related rent concession, a reduction in lease payments of £20,000 to compensate for the period the shop was closed due to COVID-19. The reduction affected lease payments due in the 2020 calendar year only and there were no other changes to the lease agreement.

The lessee has a year end of 30 April 2020 and has decided to early adopt the amendments.

The rental expense to be reflected in the accounts is as follows:

^{1. In the above scenario, since there is no lease incentive in the original agreement the original monthly rental charge in the P&L would be £10,000. If there had been a lease incentive, such as a rent free period at the start of the lease, then the original monthly rental charge in the P&L would differ. For further guidance, please refer to the helpsheet How does a lessee account for a rent free period under FRS 102?}

^{2. Under, FRS 102, this figure needs to be disclosed in accordance with paragraph 20.16(c).}

A lessor is required to recognise any change in lease income arising from rent concessions that meet the criteria (see Which concessions do the amendments apply to?) on a systematic basis over the periods that the change in lease payments is intended to compensate (FRS 102 paragraph 20.25B or FRS 105 paragraph 15.25A).

This change is similar to lessees, and so the principles in the above example for lessees are still relevant.

There are no related changes to the disclosure requirements of lessors.

If an entity preparing accounts under FRS 102 early adopts either of these amendments, it shall disclose that fact, unless it is a small entity, in which case it is encouraged to disclose that fact.

Entities preparing accounts under FRS 105 are not required to disclose early adoption of the amendments.

The FRC has not published specific guidance on the accounting treatment of COVID-19-related rent concessions which fall outside the scope of the amendments. Views may therefore differ on the appropriate accounting treatment.

The two most common types of concession which fall outside the scope of the amendments are rent deferrals (i.e. the same total rent is due, but one or more payments are, with agreement, delayed to fall due at a later date) and rent reductions which affect payments due after 30 June 2022 (originally 30 June 2021).

For most operating leases, FRS 102 paragraph 20.15 and FRS 105 paragraph 15.14 require lease payments under operating leases (excluding costs for services such as insurance and maintenance) to be recognised as an expense over the lease term on a straight line basis (further guidance is available in the helpsheet Accounting for leases under FRS 102).

A deferral of payments does not change the total contractual payments due to be made under the lease, but simply varies the timing of such payments. A deferral, in itself, should not affect the expense to be recognised in each accounting period therefore.

It would generally be appropriate to account for such changes as a lease modification, as the terms of the lease agreement have been varied.

This would result in accounting for the modification prospectively from the date of the change, with no cumulative catch-up adjustment. On this basis, the benefit of the rent concession is spread on a straight-line basis over the remaining lease term.

Under the original version of these amendments, if the rent reduction extended beyond 30 June 2021, but not beyond 30 June 2022, it would generally have been accounted for as a lease modification, as the terms of the lease agreement had been varied. This type of rent reduction would now fall within the scope of the amendments (assuming the other conditions were also met) and so the reduction should be spread on a systematic basis over the period that the change in lease payments is intended to compensate. This could lead to prior period adjustments for some companies.

Guidance for preparers of financial statements on the coronavirus outbreak is available on the Coronavirus and financial reporting hub.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.