Accounting for Rent Concessions

A rent concession is a compromise a landlord makes to the original lease terms in the hopes of attracting or keeping a tenant. Common rent concessions are free rent, reduced rent, or deferral of rent payments.

ASC 840 and ASC 842 contemplate routine changes in the terms and conditions of lease contracts however, the COVID-19 pandemic has caused rapid changes executed on a global scale which have not been considered by the auditing standards. As long as the concessions resulting from COVID-19 do not result in a substantial increase in rights of the lessor or the obligations of the lessee, an entity can choose whether to account for the concession as a lease modification under ASC 842 or ASC 840, or to not recognize it as a lease modification at all. An increase is considered to be substantial based on the entity’s professional judgement. Those who choose to recognize the concession as a lease modification would need to follow the guidance of ASC 840 and ASC 842. Those who do not choose to recognize the concession as a lease modification should take the following into consideration.

For lessees who are not recognizing a rent concession as a lease modification, the income statement is unaffected, and the balance sheet will see a debit on the lease liability and a credit on a payable account for the deferred period. When payments are made, the lessee will debit the payable account and credit cash.

For lessors who are not recognizing a rent concession as a lease modification, the income statement remains unaffected and the balance sheet will have a debit to its lease receivable to reflect the change in the timing of the payment and a credit to lease income. When payments are made, the lessor must debit the cash account and credit the lease receivable account.

Rent forgiveness can be accounted for as either as variable lease payments or as a resolution of a contingency. Both lessees and lessors who are accounting rent forgiveness or forbearance as a variable lease payment would do so as a negative variable lease payment in the impacted period. Any future repayments would be treated as positive variable lease payments.

Accounting for rent forgiveness as a resolution of a contingency can only be done so by the lessee. The lessee choosing this option would remeasure the lease on the balance sheet but would neither reassess the lease classification, nor update the discount rate for the lease. The resulting difference in the carrying amount of the lease liability would generally be recognized as an adjustment to the carrying amount of the right-of-use asset. Lessors do not have the option of using this method of accounting for rent forgiveness.

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