As a result of the COVID-19 pandemic, many companies have negotiated rent deferrals with their landlord. Under a normal environment, ASC 842 would require a remeasurement of the right of use asset and lease liability. Of course, this is not a normal environment. The Financial Accounting Standards Board (FASB) released a Q&A on how to handle the deferral concession.
If the deferral of payments results in no significant change to the total consideration of the original contract, tenants may
1. Treat the concessions as if no changes were made to the lease. Under this scenario, the lessee would increase its accounts payable as payments accrue. In the income statement, lessee would continue to recognize expense during the deferral period.
2. Account for the deferred payments as variable lease payments.
If the total consideration does significantly change, the lease will have to be remeasured for ASC 842 purposes. FASB allows reasonable discretion in whether a change of consideration is substantially more or less than the original contact amount. Tenants should provide disclosures on their financial statements discussing material concessions received from lessors.