As a direct consequence of COVID-19, many landlords have been giving rent concessions (rent holidays) to tenants on property under operating leases.
Before last week’s amendments to FRS 102 and FRS 105, the accounting requirement for both the landlord and tenant was to spread the effect of the concession over the remainder of the lease term.
If you had the situation where a tenant was given a three-month rent concession from 1 April 2020 to 30 June 2020 on a property which had three years to run at 1 April 2020 at an annual rental of £120,000, this would give rise to a monthly charge, including the rent spread, of £9,167 from 1 April 2020 (calculated as rent remaining at 1 April 2020 of £360,000 less the rent concession for the quarter to 30 June 2020 of £30,000, being £330,000 divided by the remaining 36 months).
To many, it felt counterintuitive to be spreading the rent and also reflecting a rent charge in a period when property was unoccupied and the tenant receiving no benefit, the substance being that the rent for that period had been forgiven by the landlord.
What has changed?
The amendments to FRS 102 and FRS 105 allow temporary rent concessions as a direct consequence of the COVID-19 pandemic to be recognised on a systematic basis over the periods that the change in the lease payments is intended to compensate if, and only if, all the following conditions are met:
- 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.
The above applies to both the tenant and landlord.
Therefore, continuing the example above which would require a monthly charge of £9,167 from 1 April 2020 to 31 March 2023, as a result of the change there would be no rent charge arising in the months of April 2020 to June 2020 and from July 2020 to March 2023 the monthly charge would be £12,000.
In overall terms there is no change to the rent recognised, but the revisions more accurately reflect the time pattern of a user’s benefit of the property, particularly during a lockdown period.
Additional disclosure
In addition to the existing disclosures required by FRS 102, the tenant will be required to disclose the changes in lease payments recognised in the period as a result of the COVID-19 rent concessions.
There are no changes to the disclosures for the landlord under FRS 102 or either the tenant or landlord under FRS 105.
When does this take effect?
The revisions are effective for accounting periods beginning on or after 1 January 2020, but early application is permitted.
In the case of early application, that fact should be disclosed for entities applying FRS 102. For smaller entities applying the disclosure requirements of Section 1A of FRS 102 disclosure of early application is not required but is instead encouraged.
Therefore, an entity with a 30 June 2020 year end, which included the three-month lockdown period with rent concessions, would be able to apply the revisions and appropriately reflect the change in rent charges or income.