The coronavirus pandemic or COVID-19 has and continues to adversely impact the world, causing disruption in business, the economy, as well as “normal” day-to-day living. Here in the United States, we are starting to move further into phases where COVID-19 restrictions put in place to prevent the spread are now loosening. However, there is still much uncertainty and companies will continue to have questions on the impacts of COVID-19 on accounting.
We have published a variety of blog posts on COVID-19 impacts to help inform you of the accounting impacts and implications. You can click on these links to review them as needed:
- Coronavirus (COVID-19): Top 5 Accounting Issues and Resources
- COVID-19 & Investment Companies
- COVID-19: Key Considerations for SEC Filers
- Impact of COVID-19 on Accounting for Income Taxes
- CECL: Forecasts Under ASC 326 ad Q12020 COVID-19 Impacts
The Financial Accounting Standards Board (FASB) has received inquiries and feedback from stakeholders regarding accounting impacts as businesses navigate through additional layers of complexities due to COVID-19. As part of their COVID-19 response, the FASB has indicated that “The FASB is monitoring and responding to the situation and is committed to supporting and assisting our stakeholders during this difficult time.”
While COVID-19 will have widespread accounting implications, in this blog post, we will focus on lease accounting impacts and the more recent guidance provided by the FASB.
COVID-19 Impacts on Lease Accounting
Limited ASC 842 Effective Date Deferral
As you most likely are aware, ASC 842 became effective for public business entities for fiscal years beginning after December 15, 2018. Initially, it would have been effective for private entities for fiscal years beginning after December 19, 2019; however, in November last year, the effective date was deferred.
The deferral was for an additional year with early adoption permitted as the FASB noted that the “challenges associated with transition to a major Update are often magnified for private companies, smaller public companies and NFP entities.”
Now, with COVID-19 added to the mix, the FASB has acknowledged that ASC 842 implementation and transition challenges are further amplified and have provided additional relief. They issued ASU 2020-05 in June which further defers the effective date of ASC 842 for private entities. These entities now have an additional year. So, the effective date for these entities is now for fiscal years beginning after December 15, 2022.
Accounting for Lease Concessions
Under both ASC 840 and 842, subsequent changes to lease payments that are not stipulated in the original lease contract must be assessed to determine whether lease modification accounting is applicable.
As a result of COVID-19, it is expected that lease concessions will increase, and stakeholders sought out guidance from the FASB regarding application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. In response, the FASB issued a questions & answer document addressing questions they received from stakeholders.
Stakeholders asked whether lease concessions related to the effects of COVID-19 are required to be accounted for under the lease modification accounting guidance in ASC 842 and ASC 840.
Under ASC 842/ASC 840, if a lease contract provides enforceable rights and obligations for concessions in the contract and no changes are made to that contract, the concessions are not accounted for under the lease modification accounting guidance. If the concessions granted by the lessor are beyond the enforceable rights and obligations in the contract, then generally, they would be accounted for in accordance with the lease modification guidance.
The FASB acknowledged that it may be challenging for entities to apply the guidance. As such, they indicated an entity can make an election whereby they would not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance.
The election is available for COVID-19 related concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.
To the view the full FASB’s Staff Q&A document, click here.
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