FRS 102 Section 20 Leases – Amendments to extend the relief period for accounting for Covid-19-related rent concessions

The Financial Reporting Council (FRC) has published Amendments to FRS 102 and FRS 105 – COVID-19-related rent concessions beyond 30 June 2021 that extends the application period, by one year, of the requirements that deal with the accounting for Covid-19-related temporary rent concessions under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (FRS 105).

Because the pandemic and restrictions are continuing, the amendments extend the existing accounting requirements to cover rent concessions that reduce lease payments due on or before 30 June 2022 (previously due on or before 30 June 2021), thereby ensuring that such concessions are accounted for consistently and in a way that best reflects their substance.

What the amendments mean in practice?

The amendments provide beneficial relief to lessees, and to lessors, when accounting for temporary rent concessions within operating lease arrangements that have been provided as a direct consequence of Covid-19. The concessions may be forgiveness of all lease payments for an agreed period (i.e. a temporary rent holiday), or a reduction in lease payments for an agreed period (i.e. a temporary rent reduction).

The amendments require entities (i.e. they are mandatory; not voluntary), when specific conditions are met, to recognise changes in operating lease payments (for lessees), or income (for lessors), within profit or loss that arise from Covid-19-related rent concessions on a systematic basis over the periods that the change in lease payments is intended to compensate i.e. where there have been a temporary reduction in the lessee’s benefit from the use of the leased asset. This means that the treatment should reflect the economic substance of the benefit of these concessions and their temporary nature.

What are the conditions to apply the amendments?

For the amendments to apply, all the following conditions must be 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 – the requirements do not apply to changes in lease payments that result from deferred lease payments because rent deferrals change only the timing (not amount) of the consideration;

• any reduction in lease payments affects only payments originally due on or before 30 June 2022 (previously due on or before 30 June 2021) – this condition is to restrict the timeframe that the amendments can be applied and hence ensure that only changes in lease payments arising from the Covid-19 pandemic are included within these amendments. As such, if reductions in lease payments extend beyond 30 June 2022, the rent concession in its entirety would not be within the scope of the amendment. However, a related increase in lease payments that extends beyond 30 June 2022 should not prevent a rent concession from meeting this condition; and

• there is no significant change to other terms and conditions of the lease – a concession that incorporates significant changes to a lease agreement which are unrelated to Covid-19 but negotiated at the same time as those related changes, would not meet this condition.

What are the disclosure requirements?

• For lessees – Paragraph 20.16 of FRS 102, already requires lessees to disclose operating lease payments recognised as an expense. Therefore, to ensure that the impact of any temporary rent concessions occurring as a direct consequence of Covid-19 is distinguishable from any other changes in lease payments, paragraph 20.16(c) has been amended to require lessees to disclose “the amount of the change in lease payments recognised in profit or loss in accordance with paragraph 20.15C [associated with Covid-19 temporary rent concessions]”.

• For lessors – Paragraph 20.30(c) of FRS 102 requires lessors “to provide a general description of their significant leasing arrangements”. Information about rent concessions granted would be expected to be included within this disclosure. Given this existing requirement and the current level of disclosure required for revenue in FRS 102, no additional disclosures have been specific introduced within the amendments.

What are the implications for group entities applying the amendments to IFRS 16 Leases?

Amendments to IFRS 16 Leases (IFRS 16) were published by the International Accounting Standards Board (IASB) in May 2020 in relation to the accounting for Covid-19-related rent concessions provided by lessees. In March 2021, the IASB issued an amendment to extend this application period by one year to 30 June 2022. For further details, please refer to our Mind the GAAP blog.

The amendments to IFRS 16, however, are not the same as those made to FRS 102 and FRS 105. This is principally due to the accounting requirements for lease arrangements under IFRS 16 being different to those under FRS 102 and FRS 105.

This therefore means that where a subsidiary reports under FRS 102 or FRS 105 at individual entity level, but the parent reports under IFRS at a group level, the accounting policies applied by the subsidiary and the group will likely differ and hence consolidation adjustments will likely be required when accounting for temporary Covid-19 rent concessions.

What are the amendments to FRS 105?

The same accounting amendments have been included in relation to Section 15 of FRS 105 for micro-entities. There are no new specific disclosure requirements introduced into FRS 105.

What are the first-time application requirements?

The original amendments were to be applied for the first-time to accounting periods beginning on or after 1 January 2020.

The new (June) amendments are to be applied to accounting periods beginning on or after 1 January 2021. Early application is permitted. If an entity does apply the amendments early, then it must disclose that fact, unless it is a small entity, in which case it is encouraged to disclose that fact.

The amendments are mandatory (i.e. they are not voluntary). This is to avoid entities being able to cherry-pick application to achieve specific accounting results and to ensure consistency between entities that receive, or provide, temporary rent concessions.