The Financial Accounting Standards Board’s (FASB) newest lease accounting standard, Accounting Standards Codification (ASC) 842, is facing implementation delays and challenges due to the COVID-19 crisis.  

Implementation Date:

FASB recently issued a Financial Standards Update that deferred the implementation of ASC 842 for private companies and private not-for-profit companies that have not yet applied the new standard.  These companies are allowed to defer implementation for an additional year, with the standard being effective for fiscal years starting after December 15, 2021.  Public not-for-profit organizations have an effective date for fiscal years starting after December 15, 2019.  The primary reason for delaying the implementation of the standard is to ease the pressure on financial statement preparers working in this tense economic environment.    

Accounting for Lease Modifications:

In addition to deferring the effective dates of ASC 842 for some organizations, the accounting for lease modifications is being discussed by FASB members.  The significant disruptions to business operations due to the effects of COVID-19 have increased the number of unemployed and furloughed employees as well as the number of closed businesses.  It is expected that a significant number of lessees will be requesting lease concessions and relief from lessors.  A lease concession could come in the form of free or reduced rent, interest-free deferral of payments, or cash payments to the lessee.  There may also be consecutive concessions made by lessors to lessees and could be in a mix of formats.  

Concession Testing:

A concession made by a lessee must be evaluated to determine if the concession is (1) a  modification or (2) a stipulation contained in the original lease contract.   The two steps used to evaluate the concession are:

• the enforceable rights of the lessee and lessor in the original lease contract

• the applicable laws of the jurisdiction in which the lease contract is governed

The evaluation will depend on whether the lease contract or applicable law provides for changes to payments when certain events or circumstances occur (and if COVID-19 is considered a certain event or circumstance).  Leases must be evaluated on a case-by-case basis and may require legal assistance in making the correct determination. 

If a concession is considered beyond the enforceable rights and obligations of the lease contract, the concessions would likely be considered a modification of the original contract which would not grant the lessee additional time of use of the property under contract.  The lessee will need to

• remeasure and reallocate the remaining consideration in the contract 

• remeasure the lease liability

• reassess the lease classification 

• update account for the lease

The lessor will also need to:

• reassess the lease classification with updated assumptions to account for concession as a modification of a contract

Fortunately, FASB produced detailed guidance for evaluating requested loan concessions made by lessees of lessors.  The FASB Staff Q & A was issued April 10, 2020 and it specifically addresses accounting for lease concessions requested due to the effects of COVID-19.