Audit and Technical Partner Leavitt Walmsley Associates Ltd
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FRC proposes amendment to FRS 102 and FRS 105


The Financial Reporting Council (FRC) has proposed extending the application period for accounting requirements covering Covid-19-related rent concessions. Steve Collings summarises the details.

4th May 2021
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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In October 2020, the FRC made amendments to UK GAAP in respect of Covid-19-related rent concessions. These amendments set out the accounting treatment and disclosure requirements for lessees that occupy premises through an operating lease and who receive a rent concession from the landlord to help them during the disruptive period.

A rent concession arises when the landlord forgives part of the rent that would otherwise fall due per the lease agreement. Hence, the landlord will receive less money over the remainder of the lease than they would have done had the Covid-19 pandemic not occurred.

A rent deferral is not a rent concession as a deferral merely defers a portion of the rent (it defers the cash outflow) and hence a liability is likely to be recognised in the lessee’s balance sheet at the reporting date for the rent deferred, and the profit and loss account charge will the same as it would normally be.

The FRC made changes to UK GAAP to avoid diversity in practice arising. Prior to the amendments, UK GAAP did not deal with the issue of rent concessions and some suggested that the rent concession granted by the landlord should be recognised by the lessee over the remaining lease term (in a similar way to how a lease incentive is recognised in the financial statements).

Others suggested the concession should be recognised in the period that it benefits or the period that the concession is intended to compensate.

Such diverse views were not considered to be helpful by the FRC as it would result in inconsistent financial reporting. So the regulator amended FRS 102 and FRS 105 to spell out the accounting treatment required.

FRS 102, para 20.15C clarifies that a lessee recognises a change in lease payments arising because of Covid-19 on a systematic basis over the periods that the change in lease payments is intended to compensate.

FRS 102, para 20.25B clarifies that a lessor recognises a change in lease income arising from rent concessions due to Covid-19 on a systematic period over the periods that the change in lease payments is intended to compensate.

FRS 102, para 20.15D only allows this accounting treatment for rent concessions arising as a direct consequence of the Covid-19 pandemic. This paragraph then sets out three conditions, all of which must be met, as follows:

  1. 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;
  2. Any reduction in lease payments affects only payments originally due on or before 30 June 2021; and
  3. There is no significant change to other terms and conditions of the lease.

The amendments made to FRS 105 were consistent with those made to FRS 102 (except for a specific disclosure requirement contained in FRS 102, para 20.16(c) which requires disclosure of the amount of the change in lease payments recognised in profit or loss in accordance with paragraph 20.15C).

Proposed change

On 20 April 2021, the FRC issued FRED 78 – Covid-19-related rent concessions beyond 30 June 2021.

FRED 78 proposes to make amendments to FRS 102 and FRS 105 by extending the requirements so that they apply to rent concessions for which any reduction in lease payments affects those payments originally due on or before 30 June 2022, provided the other conditions are met.

Therefore FRED 78 is proposing a 12-month extension to the cut-off date. Should these proposals go ahead, the FRC suggests that they will become effective for accounting periods beginning on or after 1 January 2021, with early application permitted.

If an entity chooses to early adopt the amendment, FRS 102, [draft] para 1.33 would require the entity to disclose the fact that it has early adopted the amendment. Small entities would be encouraged to disclose this fact.

The proposed amendments to FRS 105 are consistent with those proposed for FRS 102.

The original time condition of 30 June 2021 was included in FRS 102 and FRS 105 to limit the requirements to those concessions where the treatment reflects the substance of the concession and hence achieve consistency of reporting over this period.

The 30 June 2021 cut-off date was also included as a means of ensuring that the requirements are not applied to more broader rent concessions when it may be more appropriate to apply a different accounting treatment to those changes in lease payments.

The FRC has suggested the change in time condition to 30 June 2022 is necessary because there is a risk that rent concessions which may be granted after 30 June 2021 are similar in substance to those concessions where the requirements currently apply.

Again, the rationale of limiting the requirements to a specific timeframe still applies to reduce the risk that the requirements are interpreted and applied inconsistently.


FRED 78 confirms that the requirements will continue to be reviewed in light of any future changes that the government may announce in the future.

The FRC expects to finalise these amendments in the first half of this year and an entity will have the option to apply these amendments in financial statements which are not yet authorised for issue at the date the amendments are issued.

The comment period on FRED 78 is quite short and closes on 11 May 2021. If you wish to comment on these proposals, then please send an email to [email protected].

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