FASB staff clarifies lease modifications, other pandemic accounting issues

By Ken Tysiac

Accounting challenges related to the coronavirus pandemic have resulted in numerous questions for FASB from financial statement preparers and practitioners.

Shayne Kuhaneck, FASB’s acting technical director, answered some of these questions during the board’s meeting Wednesday. He shed light on issues related to lease modifications, interest income, hedge accounting, and other issues.

A lightly edited transcript of his comments is available below

Lease modifications

Our stakeholders have made us aware of operational difficulties experienced with applying the modification guidance in [FASB ASC] Topic 842 and Topic 840.

Because of the disruptions and businesses challenges severely affecting the global economy, caused by the COVID-19 pandemic, many lessors are or will be providing lease concessions to [lessees] for a significant number of lease contracts.

Given the unprecedented and global nature of the COVID-19 pandemic, it may be exceedingly burdensome for entities to determine whether existing contracts provide enforceable rights and obligations for lease concessions, and if so, whether it is consistent with the terms of the contract or is a modification to the contract.

As most of us are aware, subsequent changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications under Topic 842 or Topic 840. Determining whether existing contracts provide enforceable rights and obligations for lease concessions could become even more complex since certain programs being implemented or encouraged by the government permit or require forbearance, such as temporary suspension of entities’ responsibilities to perform on their contractual obligations, that is, lessors’ obligation to make the leased asset available for use to the lessee, and the lessee’s obligation to make payment, during the period impacted by the effects of COVID-19.

Furthermore, in anticipation of a large volume of these lease contracts for which concessions related to COVID-19 will likely be granted, the FASB staff understands that absent interpretive guidance, applying the lease modification requirements in Topic 842 or Topic 840 to each contract for which concessions related to the effects of COVID-19 are made could be complex for both lessees and lessors.

Therefore, the question the staff received is: “Are lease concessions related to the effects of COVID-19 required to be accounted for in accordance with the lease modification guidance in Topic 842 and Topic 840?”

While the lease modification guidance in Topic 842 and Topic 840 addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, the FASB staff believes that guidance did not contemplate concessions rapidly executed on a global scale as the result of a major crisis from the COVID-19 pandemic. The FASB staff notes that the underlying premise in requiring a modified lease to be accounted for as if it were a new lease under Topic 842 is that the modified terms and conditions affect the economics of the lease for the remainder of the lease term.

The FASB staff is aware that for concessions related to the effects of COVID-19, another view is that the recognition of those concessions for the remainder of the lease term as required under modification accounting may not be appropriate.

To provide operational clarity in response to the crisis, the FASB staff believes that it would be appropriate for entities to make an election to account for lease concessions related to the effects of COVID-19 consistent with how those concessions would be accounted for under Topic 842 and Topic 840 as though the enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract.

Consequently, for concessions related to the effects of COVID-19, an entity will not have to analyze each contract to determine whether the enforceable rights and obligations for concessions exists in the contract and can elect to not apply the lease modification guidance in Topic 842 and Topic 840 to those contracts.

This election is available for concessions that result in the total cash flows required by the modified contract being substantially the same or less than the total cash flows required by the original contract.

The FASB staff expects that reasonable judgment will be exercised in making those determinations. The staff will post the answer to this question as part of a Q&A document on our implementation website in the coming days and stands ready to assist our stakeholders with any further questions they may have regarding modification guidance.

We [FASB] will determine the need for any further Q&A documents at a future date.

Interest income

The staff recently received a technical inquiry regarding the recognition of interest income. For illustrative purposes that inquiry included a fact pattern whereby a lending institution was providing assistance to borrowers impacted by COVID-19.

The institution in the example provided a loan payment holiday, allowing borrowers to temporarily stop payments for a period of time. Interest would not accrue while the loan payment holiday is in effect. The loan modification in the fact pattern did not represent a troubled debt restructuring in accordance with Subtopic 310-40, Troubled Debt Restructuring by Creditors.

Additionally, in accordance with Subtopic 310-20, Nonrefundable Fees and Other Costs, the modification would be accounted for as a continuation of the original lending arrangement, that is, not as a new lending arrangement. In which case, the modification would not be accounted for as an extinguishment of the original loan and subsequent recognition of the new loan.

The question is: “In this scenario, how should the institution recognize interest income when a payment holiday is given and interest does not accrue?”

There were two views expressed in the technical inquiry. In view one, upon modification a new effective interest rate in accordance with Subtopic 310-20 is determined 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 continues to be recognized during the payment holiday period.

In view two, upon modification the institution should recognize interest income on the loan in accordance with the contractual terms. Under this view, the institution would recognize no interest income during the payment holiday and would resume recognizing interest income when that payment holiday ends.

The FASB staff reviewed the submission, accompanying illustrations, and referenced accounting guidance and believes both views to be appropriate. That is, the guidance in Subtopic 310-20 would not preclude institutions from applying view one, recognizing interest income during the payment holiday period.


In accordance with Subtopic 815-30, Cash Flow Hedges, if cash flow hedge accounting is discontinued, amounts deferred in AOCI [accumulated other comprehensive income] should remain in AOCI unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within a two-month period of time thereafter.

In rare occasions, the existence of extenuating circumstances that are outside of 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 those cases, amounts deferred in AOCI should remain in AOCI until the forecasted transaction affects earnings. That is, in those rare cases, an entity should disregard the timing restrictions otherwise applicable to the forecasted transaction and continue to defer amounts previously recorded in AOCI until the forecasted transaction affects earnings.

The question posed to the staff was: “When cash flow hedge accounting has been discontinued, may delays in timing of the forecasted transactions related to COVID-19 be considered rare cases caused by extenuating circumstances outside the control or influence of the entity?”

The staff believes the exception in Subtopic 815-30 related to rare cases caused by extenuating circumstances outside of the control or influence of the entity may be applied to COVID-19-related delays in timing of the forecasted transactions.

Consequently, for de-designated hedges, if the forecasted transaction is probable of occurring after the additional two-month period, the entity may continue to retain amounts previously recorded in AOCI associated with that forecasted transaction until that forecasted transaction affects earnings.

However, that exception only applies to situations in which the forecasted transaction remains probable of occurring. If the entity determines that it is not probable that the forecasted transaction will occur because of the effects of COVID-19, the exception would not apply and the amounts previously recorded in AOCI would be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.

The FASB staff continues to monitor this unique and evolving situation and work with stakeholders on questions arising. We will communicate with the industry as this situation unfolds, including through additional statements, technical inquiries, and Q&A documents as appropriate.

Fair value

We [FASB] recently received a request to suspend mark-to-market accounting. In that request, the authors of the letter specifically referenced guidance developed during the 2008–2009 financial crisis.

I would like to take this opportunity to remind our stakeholders of the orderly transaction guidance that still exists in Topic 820, Fair Value Measurement, and specifically refer you to Paragraphs 54(c) through 54(j) of ASC Section 820-10-35, which provides guidance for measuring fair value when the volume or level of activity for an asset or a liability has significantly decreased and provides guidance on identifying transactions that are not orderly.

The staff certainly stands ready to address any interpretive questions our stakeholders may have with respect to that guidance but believes that guidance should answer the questions posed in the recent agenda request.

US Small Business Administration (SBA) loans

It is our understanding that the recent stimulus provides for SBA loans that would be 100% guaranteed and forgivable by the SBA if the small business uses the loan proceeds for certain costs.

A question has arisen on how fees for originating these loans should be accounted for; that is, as a yield adjustment over the life of the loan, or upfront when received.

The staff are reviewing this technical inquiry and will determine the appropriate way to inform our stakeholders of the answer to the inquiry in the coming days.

Open for business

I’d like to reiterate that we [FASB] are open for business. Although we are working remotely, we are here for you to help answer your questions and assist you in these unprecedented times.

To that end, I would say we have delayed our deliberations on current projects. That has been a deliberate choice in order to shift our resources to assist all of you with answering your questions.

So, if you have questions or are struggling with interpretations, please submit a technical inquiry, pick up the phone, or send us an email. We’re here to help.

Editor’s note: The questions to FASB on interest income and SBA loans were submitted by the AICPA Depository and Lending Institutions Expert Panel.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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