In October 2020 the FRC released an amendment to UK GAAP to ensure the standardisation of the accounting treatment of temporary rent concessions that have been offered by landlords as a direct consequence of covid-19. The amendments are applicable to accounting periods commencing on or after 1 January 2020 with early adoption being permissible.
Accounting for Operating Lease Arrangements under FRS 102
The original version of FRS 102 required operating lease payments to be recognised on a straight line basis over the non-cancellable lease term unless another systematic basis of recognition is considered more appropriate. The same recognition basis was also required for any lease incentive. This led to debate over the period in which temporary lease concessions should be spread, either to take the rent reduction as it arises or to spread the lease amendment over the full non cancellable lease period.
The updated October 2020 version of FRS 102 includes a new provision to clarify the treatment. It states that any temporary rent concession, arising as a result of covid-19, that reduces the amount of rent payable under the operating lease, shall be recognised on a systematic basis over the period that it is intended to compensate. This is to reflect the temporary nature of the concession and will result in there being minimal impact on future accounting periods.
Disclosing Operating Lease Arrangements under FRS 102
If an entity is materially impacted by rent concessions, the operating lease accounting policy should be updated to make it clear how rent concessions have been accounted for. Although most reductions in rent will only impact the profit and loss charge in one year, some entities will have a rent concession which spans a year end, resulting in the operating lease commitment due within one year also needing alteration from the amount disclosed in the prior year. Depending on the value of the rent reduction, and what is considered to be material in the financial statements, there may also be a requirement to disclose the details of the new rent arrangements both in terms of the impact on the profit and loss charge for the year, the commitment payable in the future and how this has provided support to the entity during the pandemic.
Disclosing Operating Lease Arrangements under FRS 102 section 1A
The disclosures for full FRS 102 all remain relevant for small company reporting. Consideration should also be given as to whether or not further disclosure is required in order that the financial statements give a true and fair view. This is not always achieved automatically from simply following the standard. Materiality will feature here in terms of how significant the rent reduction is not just in terms of value but also its significance in enabling the entity to continue as a going concern. Section 1A of FRS 102 also has a requirement for significant items in the profit and loss, due to either their size or incidence, to be explained by way of a note.
Operating Lease Arrangements and FRS 105
The accounting treatment for FRS 102 also applies for micro entities. The disclosure requirements are however a lot less. The only mandated disclosure requirement is the operating lease commitment. The amount due within one year will be particularly relevant in circumstances where the rent concession continues beyond the entity’s year end and in to the next reporting period. FRS 105 does not have any further statutory operating lease disclosure requirements, however additional disclosures can be included if it is felt that they are of particular significance. Where this is thought to be the case, any disclosure provided must meet the requirements of FRS 102.
In October 2020 there was also EU endorsement of a similar amendment to IFRS 16 permitting an entity to elect not to consider whether a rent concession is a formal lease modification. The conditions to be met for this exemption to apply are: the change results in the rent payable being the same or less than the rent previously payable; the rent reduction is applicable to rent due on or before 30 June 2021; and there is not a material change in the other terms and conditions of the lease. Where an entity takes advantage of this amendment, disclosure would be required in the financial statements.
Contributing to your success
If you would like to discuss the impact of rent concessions or other covid-19 support on your financial statements please get in touch with your usual Albert Goodman contact or Sophie Parkhouse direct.