As a result of the COVID-19 pandemic, the economy has faced many challenges and a need for adaptation. One change can be seen in regards to rent concessions given to leaseholders by their Landlord as a result of this global crisis leading to more home working and less occupation of office space by employees. Such concessions have been granted through rent holidays and through temporary rent reductions.
FRS 102 did not explicitly specify how to account for temporary changes in lease payments that may arise as a result of rent concessions, therefore the FRC has made some amendments to FRS 102 and also to FRS 105 for Micro-entities. It should first be noted that any rent concession will need to satisfy all three of the following criteria in order to be recognised under these amendments:
- the change must result in a reduction in the total payments due under the lease (i.e. if payments are only deferred rather than reduced, this criteria is not satisfied*);
- the reduction in lease payments only affects payments originally due on or before 30 June 2021;**
- there is no significant change to other terms and conditions of the lease.
It should also be noted that the amendments are effective for accounting periods beginning on or after 1 January 2020, however early adoption is permitted in order to avoid the need for prior year adjustments being made in the following year. Early adoption must be disclosed for entities preparing accounts under FRS 102, however such disclosure is not necessary under FRS 105.
Under FRS 102, additional disclosure is now required by the lessee under disclosures for operating leases, of the amount of the change in lease payments recognised in profit or loss. As for the lessor, any change in lease income arising from rent concessions should be recognised on a systematic basis over the periods that the change in lease payments is intended to compensate.
As for FRS 105 however, the lessee is not required to disclose the amount of the change in lease payments recognised in profit or loss. Instead, they must recognise any change in lease payments arising from rent concessions on a systematic basis over the periods that the change in lease payments is intended to compensate, and the requirements for the lessor are the same as under FRS 102.
| Simple Illustration – Rent Concession | £ |
| Monthly rental charge as per lease | 2,000 |
| Rental charge for year-ended 31 Dec 2019 | 24,000 |
| Rent concession due to 3 month closure in 2020 | (6,000) |
| Rental charge for year-ended 31 Dec 2020 | 18,000 |
In this illustration, it should be noted that the monthly rental charge per the lease agreement will remain at £2,000 and therefore this is only a temporary rent concession which satisfies all 3 of the aforementioned criteria. The lessee must disclose the £6,000 rent concession if operating under FRS 102, but this is not required for Micro-entities operating under FRS 105.
* Rent deferrals, which do not satisfy criteria 1 for the amendments mentioned above, simply delay payments to be made and do not alter the total payments due under the lease. As such, there should be no change to the amount to be recognised in each accounting period.
** Rent reductions on payments due on or after 30 June 2021 do not satisfy criteria 2 above as these can simply be accounted for from the date of change, with no effect to prior periods.
If you have any queries in regards to COVID-19 adjustments, please get in touch with a member of our team on 020 7306 9100 where we will be happy to assist you.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.
Written by
Luke Doody