FRC looks to extend rent concessions for retailers

With many retailers still reeling from the impact of the lockdowns, the Financial Reporting Council (FRC) has proposed extending the application period of requirements that cover the accounting treatment of temporary rent concessions granted due to the pandemic by one year.

The amendments would be effective for accounting periods beginning on or after January 1, and apply to concessions with regard to rental payments that would fall due before June 30, 2022. The amendments can be early adopted.

The time period has been extended from the original proposals in reflection of the continuing impact of the pandemic.

For companies that adopt UK and Irish GAAP, the FRC amended FRS 102 in October 2020 to make the accounting treatment of coronavirus-related rent concessions more consistent, and requires companies to match the concessions granted by landlords to the periods of downturn they are intended to cover. This was similar to the IASB’s modification to its IFRS 16 standard in May 2020, aimed at simplifying how companies subject to IFRS need to treat leases impacted by the pandemic.

“The FRC version differs slightly to IASB’s revision because FRS 102 doesn’t prescribe the accounting for lease modifications in as much detail. In the absence of prescriptive guidance retailers could have made different choices under UK GAAP in terms of how they were going to account for rent concessions,” says Natasha Jones, retail sector lead for Audit at KPMG.

“The main objective of the FRC was to bring consistency to reporting, and to match concessions to those periods they are intended to compensate. So whereas under IFRS there is a choice to apply the exemption to the modification accounting rules, there isn’t a choice under UK GAAP. If your concession meets certain criteria, e.g., you’ve had a short-term temporary rent reduction, you have to treat it as a reduction in the period you are suffering the losses of the store closures.”

She believes a year’s extension should suffice even if there are further lockdowns in the year ahead. If not, there could be further extensions down the line.

A possible unwanted effect of this extension, and the timing of its release, is those companies that have already signed off this year’s accounts might need to retrospectively amend them next year if they had concessions that did not meet the initial criteria. With the October 20 guidance stating the impact could only last until June 2021, any company already signed off on that basis will find they might need to amend their accounting in the prior year if they had a benefit that extended beyond June 2021 and have instead accounted for it as a lease modification.

“The timing isn’t ideal, but I suspect in practice it won’t impact too many retailers as a significant number have their year-ends around January, and from the types of concessions we have seen granted, many were short term in nature,” says Jones.

The concession does not apply to rent deferrals. Among healthy retailers Jones says she has seen a higher proportion of landlords giving rent deferrals rather than concessions, with rent holidays being more forthcoming to retailers or individual stores that might otherwise struggle to continue in business. Whilst this has been helpful from a cashflow perspective to the retailer, it has also given some protection to landlords.

She says a small number of retailers have also negotiated longer-term modifications to their lease agreements, such as concessions in return for a lengthening of the lease, or turnover-based rents, which benefits the retailers during lockdown but gives landlords the opportunity for upside in future periods when revenues return. These types of concessions would fall to be treated as lease modifications given the longer-term nature of the concession.

Although the lockdowns have led to significant disruption, loss of income in physical stores has partly been offset by a substantial increase in online revenues. For many retailers, the high online activity has continued between lockdowns when stores opened again which could be due to many people still wary about going out to stores.

However, Jones thinks there is a much broader and long-lasting shift to online shopping, with many retailers expecting to sustain a high proportion of the online trade uplift, particularly in light of the significant number of new customers who hadn’t previously shopped online but are now comfortable with the technology.

Government funding has also supported retailers. This has included a 12-months rates holiday to the end of March and deferral of various tax bills.

Andrew Goodacre, CEO of the British Independent Retailers Association (BIRA), thinks the government could do more. Research his organisation carried out last year found that 60 percent of its members were finding their landlords uncooperative.

“We’ve worked with other organisations trying to convince the government to consider breaching any gap in terms of rental debt. Would they set up a fund that landlords and tenants could tap into when circumstances arise? The government has steadfastly said no.”

The government introduced a moratorium that prevents legal action by landlords. But, Goodacre says it’s kicking the problem down the road to when you stop the moratorium.

“The moratorium has to end at some point as you can’t keep denying landlords their rights. We would like to see some form of mediation, maybe a dispute resolution service developed whereby if the landlord and tenant really cannot agree and both parties feel the other is being unreasonable, then a general arbitration service would be available.”

He is fearful of leaving it to market forces since planning laws are beginning to make it easier to change the use of premises. For example, landlords could get rid of their tenants to convert a shop into accommodation. It could be that landlords see conversion as a better option than reducing rent on a commercial lease.

“It’s a crying shame that these were often perfectly good businesses before the pandemic struck, with people earning a living, and just as they can open their businesses again, through no fault of their own, could find themselves having the rug pulled from under their feet.”