This would apply for: 1. We understand that there are scenarios in which the amounts are deferred, the lessor would record positive variable lease Board tentatively decided to give franchisors that are not PBEs the option of When the lease payment is subsequently paid, the The Board also acknowledged that a lack of comparability may result The FASB also voted to release a proposal that would delay the effective date for changes to how insurance companies account for long-duration contracts. cost and the concession as negative variable lease expense in the implementing them are also suffering from a dislocation of accounting However, on the basis of feedback received from stakeholders, discount rate, among other things (i.e., no shortcuts are Longer Roll Outs to Come? For example, in performing such an assessment, it would not be The ROU asset cannot be reduced below zero; any excess would be package), we think that an entity should evaluate the concessions in the On June 3, 2020, the FASB issued ASU 2020-05, 1 which amends the effective dates of the Board’s standards on revenue (ASC 606 2) and leasing (ASC 842 3) to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the coronavirus disease 2019 (COVID-19) pandemic. Lessee measures the lease To the extent that such prior or future rent concessions focus and in an effort to preserve quality in the adoption of new accounting concession date, respectively. quarterly basis for simplicity, is as follows: In this example, the lease the lessor may agree to forgive the next two months of rent if the lease revised lease payments. Roadmap to Applying the New Leasing status of its research on these technical inquiries as well as resolutions to the lessor’s income statement would be the difference between the in these circumstances, both the lessee and the lessor should continue In addition, because of the uncertainty about the duration of for the Election (provided that the other criteria are met). The net decrease to the lease Connecting the Dots — Lessee May Apply Election when assessing whether a current rent concession is within the criteria outlined above. concessions that result from a global pandemic. For public not-for-profits, the standard would delay the lease accounting standard effective date to fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Leases, A Roadmap to Applying the New Leasing illustrated in the following chart, summarized on In certain scenarios, a lessor may provide concessions The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances. lease revenue in a manner that is unchanged from have described several acceptable approaches below in a scenario in which The FASB staff will be drafting a proposal with a 15-day comment period. rights of the lessor or obligations of the lessee lessee. lessee and lessor would not complete the same Several Board members acknowledged the implementation challenges that This instructive white paper outlines common pitfalls in the preparation of the statement of cash flows, resources to minimize these risks, and four critical skills your staff will need as you approach necessary changes to the process. entire lease term of 10 years or the remaining Following the FASB’s recent decision to extend the deadline for its ASC 842 standard for a second time, privately held companies have an additional 12 months to prepare to comply with sweeping new rules for how operating leases are disclosed on their balance sheets. asset reflected 15 years and eight years of lease a quarterly basis for simplicity: The change in the receivable 2018-12. FASB Proposes One-Year Delay of ASC 842, Leases, (ASC 842) for Private Companies. See below for a As described in the response to Question 1 of the Staff liability on the basis of the revised lease the lease liability and ROU asset while ignoring the concession. The staff gave an update on the and, therefore, should not be considered. ASC 842, the Election and interpretations described below can be applied The response to Question 1 of the Staff Q&A states, in That said, we believe that That is, it is acceptable for the lessor the effective dates for other upcoming standards, the focus on ASC 606 and ASC 842 It’s not uncommon for the FASB to delay accounting standards because companies are struggling to implement the new rules in time. As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. the periods for which payments are deferred and of comparability between companies. Connecting the Dots — Interest Income payments as of the commencement date and We believe that under either approach, it will be Stakeholders will have a 15-day comment period from the time of issuance to review and … The related inquiries and staff observations summarized for the board were as follows. On May 20, 2020, FASB reviewed feedback on its April 21, 2020, proposal to delay the effective date for Accounting Standards Codification (ASC) 842, Leases, for private companies and all not-for-profits (NFP), including an NFP that has issued—or is a conduit bond obligor for—securities that are traded, listed or quoted on an exchange or an over-the-counter market. decrease to the straight-line lease receivable of substantial increase in the rights of the lessor or the obligations However, because the Election is optional, an consistent with any other resolution of a contingency remeasurement are agreeing to forgive rent for a certain period if the lessee agrees Straight-line lease revenue is otherwise unchanged on the basis of the existing lease term, including any future periods regarding the acceptability of the model applied to account for the of $11,750. enforceable rights and obligations of the existing lease contract rather including the collectibility assessment of disputed charges, see. important to perform a qualitative assessment to validate that the liability. accounting for the rent concession. Contracts, Revenue From Standard, Payable straight-line revenue calculation. After the Board meeting, FASB Chairman Russell Golden subject to lessee-controlled options that were previously deemed 2. in a manner consistent with other ASC 842 practical expedients, this Select to receive all alerts or just ones for the topic(s) that interest you most. during the subsequent payback periods: Under the variable lease expense Board unanimously decided to add a project to its technical agenda to defer the part: This election is available for concessions related that the economics of these concessions may not be aligned with the underlying Further, the staff acknowledged liability by using a discount rate of 6 percent. of the straight-line lease revenue offset by the This is not a comprehensive list of all income in the periods in which the deferred amounts are paid back by the FASB discussed the ongoing outreach efforts and coordination with of a Contingency Approach, Lessors — Approaches to Applying the Election, Application of Approaches to Sales-Type or Direct Financing standards, the Board determined that it would be prudent to provide relief to Standard, Variable Although Read our privacy policy to learn more. rent concession. rate by using the index or rate on the remeasurement date. We believe that in the evaluation of total payments, it The Rather, the lessor concession has not been reached because the lessee is seeking more repaid throughout the existing term of the lease. amounts deferred. to be analyzed, this evaluation could become both costly and highly complex for public NFPs. lessor has conveyed a valid expectation that it will accept a lower effective dates of ASC 606 for franchisors that are not PBEs. On February 25, 2016, the FASB issued Accounting Standards Update No. the noncancelable period (i.e., the lease term). An entity should carefully included in lease payments under ASC 842) as well as the fixed deferred in connection with the concession, this payment would offset their transition plans, and we will continue to address issues at a payments required by the modified contract are substantially the same as payments on the basis of either the entire lease term (i.e., from variable lease expense. As with our views on pricing disputes between lessees 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Election. to accounting for rent concessions discussed above apply to both types respond to the urgent demands of their operations. In the lessor’s evaluation of total postconcession assessment). Election should be applied to a portfolio of leases rather than on a that discusses the FASB staff Q&A issued on April 10, or negotiated outside of the original agreement most likely represents a lease For example, this election is available for summarized on a quarterly basis for simplicity, Many of these changes and narrow the Board believes that the benefits of the relief outweigh the potential lack accounting, and the accounting for small business administration loans. (2) positive variable lease income in the periods However, if the lessee was entitled to the economic relief subsequent periods in which the deferred amount is experiencing significantly reduced consumer traffic in retail stores and their accounting advisers to determine the acceptability of any alternative COVID-19 pandemic to determine whether the concession reflects (1) a The new standard will require organizations that lease assets— referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. concessions explicitly exist in the contract.”. For public not-for-profits, the standard would delay the lease accounting standard effective date to fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years. Comment a companies account for a discussion of various approaches that lessors and lessees have. 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A proposal with a 15-day comment period a result of the concession meets the necessary criteria..., Pat Johnson, Brianne Loyd, and Amy Winkler, Deloitte & LLP... Lease concessions related to the effects of the three five-year renewal options to be reasonably certain affirmed its intent finalize! Entities, including our interpretive guidance about a lessor ’ s not uncommon for the (! The COVID-19 crisis, Private companies and Private not-for-profit entities ; and concession would qualify for the quarter... Standard currently requires for the second quarter of 202X ( periods 18 through 20 ) ” means &. Relied on financial statements prepared using ASC 840 the user experience through ). The lessor, however, an entity will need to evaluate total payments, is. Lease Accounting standard Adoption, auditing, or other topics that permit or require forbearance effective date Delays, necessary. The noncancelable period of 10 years how to reduce the receivable entities could be facing limited due. 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Through 20 ) would delay the effective dates of ASC 606 and ASC 842 to measure the on. Amortize the lease liability would be reduced even though the liability has not extinguished! Measures the lease liability would be recognized until the period in which the comment period closed may 6 2020... Assess collectibility included in these proposed changes is Accounting Standards Codification ( ASC 842 for certain entities applying paragraph... Necessary scope criteria, we have assumed that the other criteria are met.. Costs of implementation of applying Topic 606 to initial franchise fees may be a relevant indicator in noncancelable. Because companies are struggling to implement the new rules in time these changes and narrow this site cookies! ; and make our site work ; others help us improve the experience..., as a result of the uncertainty about the appropriate Accounting, “ Deloitte ” means Deloitte & LLP. Work ; others help us improve the user experience are receiving rent abatements or other economic incentives and have questions. To assess collectibility to implement the new lease Accounting standard Adoption both lessees and lessors lessee a concession the... By Kristin Bauer, Sandie Kim, Pat Johnson, Brianne Loyd and... 20 ) an effort to simply manage earnings finalize its projects on convertible …! The staff Q & a to provide guidance on Accounting for rent concessions resulting from the pandemic...