Covid-19: Rent holidays in the financial statements under FRS 102
Written for Bloomsbury Professional
The significant level of disruption caused by the Covid-19 pandemic cannot be under-estimated. Since government lockdown restrictions started in March 2020, non-essential businesses have had to close causing concern for many, especially entities operating in the retail sector (which was already experiencing a decline in business activity pre-Covid-19). Other sectors have also seen significant levels of disruption since lockdown restrictions were imposed.
Many landlords are providing tenants with rent holidays to support them through the Covid-19 crisis. However, this is one of many types of reliefs businesses are receiving to assist them which will need to be reflected in the financial statements. This is the first article in a series of short articles that will provide some insight as to how to deal with rent holidays from the perspective of the lessee. Further articles will examine Covid-19 related grants and loans and how these should be reflected in the financial statements.
UK GAAP accounting treatment for a rent holiday
Neither FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland nor FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime deal specifically with rent holidays. This is an emerging issue and one which, hopefully, the Financial Reporting Council (FRC) will provide some guidance on in the near future.
A rent holiday is not the same as a ‘lease incentive’ because such incentives are usually given for a new lease or when a lease is being renewed. Indeed, a lease incentive differs from concessions because concessions are provided to compensate lessees’ for periods where they are unable to benefit from using the leased asset.
Rent holidays are being referred to as a ‘lease modification’ although FRS 102 and FRS 105 do not use such a term. Some commentators are suggesting that the rent holiday should be spread over the remainder of the lease term (i.e. in the same way that a lease incentive would be). Conversely, there are arguments to suggest that the rent holiday should be recognised in the period which benefits from the holiday rather than spread over the lease term.
In the author’s view, where the entity is reporting under UK GAAP and the lessee is not able to benefit from using the leased asset (e.g. because the premises have been closed due to lockdown restrictions), the rent holiday should be recognised in the period that benefits from the holiday rather than spread over the remaining lease term. This treatment is also simpler and is consistent with other types of Covid-19 reliefs, such as business rates holidays which are also recognised in the period that benefits.
Conclusion
The FRC will hopefully issue some form of guidance in the near future to address the issue of rent holidays and to reduce diversity in practice. If the FRC do produce guidance or commentary concerning rent holidays, Bloomsbury Professional will issue further updates.
Category: Accounting and standards
