FASB activity on lease concessions, cash flow hedges, and other COVID-19 questions

The Financial Accounting Standards Board (FASB) staff provided an interpretative Q&A that provides reporting entities (lessees and lessors) with an acceptable approach to account for lease concessions related to the novel coronavirus, but only those concessions that do not result in a substantial increase in the (i) rights of the lessor or (ii) obligations of the lessee. This elective accounting approach is available for coronavirus-related concessions that result in “the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.” Under this approach, a reporting entity can elect to apply or not to apply applicable lease modification accounting guidance. This approach may only be applied to coronavirus-related concessions as described above. 

The FASB staff provided two methods to account for a coronavirus-related concession granted in the form of payment deferral (i.e. only timing, not total amount, of consideration in the contract changes) when the option not to apply lease modification accounting guidance has been elected. Each method is discussed below. 

1. Account for a payment deferral as if there has been no change to the lease contract. Under this method, lessees and lessors would continue their current lease accounting. Accordingly, a payment deferral would be accounted for (a) by a lessor as an increase to its lease-related receivable on its balance sheet with continued lease-related income recognition in its income statement; and (b) by a lessee as an increase to its accounts payable with continued lease-related expense during the deferral period. 

2. Account for payment deferrals as variable lease payments. Under this method, lessees and lessors would continue their current lease accounting, but would recognize a concession as it occurs. During the period for which the concession was granted: (a) a lessor would not recognize lease-related income on the lease because it would be offset by the concession; and (b) a lessee would not recognize lease-related expense because it would be offset by the concession. However, lessor and lessee balance sheets, to the extent applicable, would be adjusted accordingly. When the deferred payments are subsequently paid, lessors and lessees would recognize payments of the previously deferred amounts as incremental lease-related income and lease-related expense, respectively. 

The FASB staff Q&A be found here.

At its April 8, 2020, meeting, the FASB discussed the following coronavirus-related accounting considerations. 

1.Interest income treatment during “loan payment holidays” 

The FASB has indicated it believes both of the following views are appropriate when a situation is not a loan receivable accounted for as a troubled debt restructuring: 

a. View 1 – Upon modification, a new effective interest rate is determined in accordance with Subtopic 310-20 that equates the revised remaining cash flows to the carrying amount of the original debt and is applied prospectively for the remaining term. That is, interest income is recognized from the modification date forward based on the new effective interest rate, including during the “loan payment holiday.”

b. View 2 – Upon modification, interest income on the loan should be recognized in accordance with the contractual terms. However, during the “loan payment holiday,” no interest income on the loan would be recognized. It would resume when the payment holiday ends.

2. Accounting for discontinued cash flow hedges when the underlying hedged transaction is delayed because of the impact of COVID-19

a. When a cash flow hedge is discontinued or de-designated, a reporting entity evaluates whether the hedged forecasted transaction remains probable of occurring by the end of the time period originally specified in its hedge designation documentation or within a two-month period thereafter to determine whether related amounts deferred in accumulated other comprehensive income (AOCI) should remain there. “In rare cases, the existence of extenuating circumstances that are outside the control or influence of the entity may cause the forecasted transaction to be probable of occurring at a date that is beyond that additional two-month period.” In such cases, related amounts deferred in AOCI should remain there until the hedged forecasted transaction affect earnings. The FASB staff determined that COVID-19-related delays in the timing of hedged forecasted transactions could represent such extenuating circumstances. However, this exception applies only to situations in which the forecasted transaction remains probable of occurring. 

3.Fair value measurements 

The FASB staff lastly provided a reminder that Topic 820, “Fair Value Measurement,” provides guidance for identifying transactions that are not orderly and for measuring fair value when the volume or level of activity for an asset or a liability has decreased significantly. 

On April 21, 2020, the FASB issued a proposed Accounting Standards Update that, if finalized, would provide for the deferral of the following accounting standards: 

4. Lease Accounting

a. Proposed an additional one-year deferral of the effective date of Topic 842 for private companies and not-for-profits other than those described in b. below to fiscal years beginning after Dec. 15, 2021 (e.g. calendar year 2022). 

b. Proposed one-year deferral of Topic 842 for not-for-profits that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market and which have not yet been issued financial statements to fiscal years beginning after Dec. 15, 2019 (e.g. calendar year 2020).

c. Early adoption continues to be permitted for these reporting entities.

5. Revenue from Contracts with Customers (Topic 606)

a. Proposed one-year deferral of Topic 606 for franchisors that are not public business entities to fiscal years beginning after Dec. 15, 2019 (e.g. calendar year 2020).

CohnReznick will continue to monitor the response of the FASB and its staff to this situation and will provide further communications, as and if appropriate.