As the pandemic keeps brick-and-mortar businesses shuttered across the country, landlords are giving concessions to retailers, restaurants and offices that have been closed through no fault of their own. That’s welcome news for tenants. But it’s a potential nightmare for accountants—particularly those of public companies, which are subject to new accounting rules for lease modifications. As we expected it would, the Financial Accounting Standards Board has now stepped in to address the sticky situation. FASB issued clarifying guidance that effectively allows parties to ignore its lease modification standard for lease concessions related to COVID-19, and some public companies have already said they’ll be taking advantage.
Lease accounting has been a major topic of conversation for several years now, going back to at least 2016, when FASB first unveiled rules requiring corporate lessees to include leases on their balance sheets. The new standard, known as ASC 842, became effective for public companies on January 1, 2019. It included new rules on lease modifications, which ASC 842 defines as “a change to the terms and conditions of a contract that results in a change in the scope of, or the consideration for, a lease.”
Applying this new standard proved challenging to private enterprises even under normal conditions. (The implementation date for private companies was pushed back to January 2021 after many felt unprepared for the transition, and it may be delayed even further.) But now, in the midst of a pandemic, public companies face the prospect of having to apply this new standard to hundreds or even thousands of lease modifications.
That’s no small task for, say, a retailer with 1,500 locations. For starters, it would have to review hundreds of individual leases to determine whether specific rent concessions it received “changed the terms” of the relevant lease (and thus might qualify as a modification) or, instead, was required by the lease. Recognizing that ASC 842 was not meant to be applied in bulk, however, FASB has saved public lessors and lessees alike from all that work.
In Q&A released last month, FASB said it will spare parties the trouble of determining whether any landlord concessions qualify as a lease modification under 842. As FASB clarified, they can just ignore that question altogether. Instead, they can treat any pandemic-related concession (including deferrals of lease payments and reductions of future lease payments) as if it were required by the lease. (If for some reason they want to, they can also decide to treat them as modifications under 842.)
Already, public companies are declaring their intent to take advantage of the relief. Here’s what four have said:
Starbucks: “Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat COVID-19-related rent concessions as variable rent.”
Estee Lauder Companies: “The company . . . expects to adopt this guidance in the fiscal 2020 fourth quarter.”
Prologis, Inc. (a REIT): “For rent deferrals granted as of April 27th, we are allowing customers to defer rental payments until later in 2020, in exchange for a note receivable, and we are continuing to recognize rental revenue during the period.”
Duke Realty Corp. (a property owner): “We have tentatively determined that we will apply the accounting relief provided by the FASB only to . . . short-term rent deferrals . . . .”
Without doubt, public companies that lease property have many sources of stress at the moment. It’s equally certain, however, that they’re thankful to be temporarily relieved of the nagging headache that is lease accounting.