In response to the continuing impact of Covid 19 the Financial Reporting Council (FRC) has extended the accounting requirements for special conditions for reporting rent and lease concessions/reductions under FRS 102 and 105 well into next year. The change will enable businesses to present a clearer picture of their performance in year-end accounts.

Many entities have struggled to pay rent and meet lease payment commitments for their rental properties. This has led to negotiations between tenants and landlords in the form of rent concessions (deductions in rent or waivers) or rent deferrals (an agreement to pay rent or lease payments until a later date).

According to the FRC, the prolonged duration of the pandemic has made it necessary to extend the existing reporting time for a further 12 months to 30 June 2022 to help ensure consistency and accuracy in financial reporting and in such a way that best reflects their substance.  The disclosure of the reality of rent concessions for businesses, will achieve a true and fair presentation by recognising the reduction in full for the period concerned.

The concession means that if a business doesn’t have to pay rent for a given month, no expense will be recognised for that month. Prior to the advent of Covid-19, a rent reduction would have been recognised over the life of the lease.

The main conditions of the proposals contained in FRED 78 are:

  • Entities must recognise changes that reduce lease payments in the period to 30 June 2022, and meet the other specified conditions, on a systematic basis over the periods that the change is intended to compensate, rather than spreading the impact of the change, over future lease periods.
  • The amendments are effective for accounting periods beginning on or after 1 January 2021, with earlier application permitted.

The net impact will be that if the business doesn’t have to pay rent for a given month, no expense will be recognised for that month thus allowing companies to report a more accurate picture of their cash management, performance, and rent-related support measures, reflecting the businesses’ economic reality.

There are rumours that the FRC may seek to extend the reporting period again, at least until the end of the pandemic, especially if there are further lockdowns, during winter, potentially leaving the retail sector in the same position as before.

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