How to Accurately Record Rent Concessions or Waivers from Your Landlord in Lease Accounting

Rent concessions or waivers are temporary incentives landlords offer to tenants to attract or retain them, often in the form of rent abatements, deferrals, or discounts. Properly recording these concessions is essential for accurate financial reporting and compliance with lease accounting standards such as ASC 842 and ASC 840.

Understanding Rent Concessions

A rent concession can be a discount or waiver that reduces the tenant’s rent payment obligation temporarily. These may include partial rent forgiveness, deferrals of rent payments, or other forms of relief negotiated between the landlord and tenant. For example, a landlord might offer a tenant a three-month rent concession during a lease term to mitigate financial hardship or attract tenants in a competitive market.

Lease Agreement Documentation

It is critical that any rent concession or waiver is explicitly documented in the lease agreement or through a lease addendum. This documentation should specify the duration, exact amounts, terms of the concession, and any related conditions. Clear documentation helps prevent future disputes and ensures both parties understand their rights and obligations.

Applying Accounting Standards for Rent Concessions

According to current lease accounting guidelines (ASC 842 and ASC 840), the accounting treatment of rent concessions depends on whether the concession constitutes a lease modification:

• If the concession falls within the enforceable rights already included in the original lease and no other lease terms are changed, it is typically not treated as a lease modification. Instead, the tenant continues to account for the lease using existing terms, while recognizing a payable for deferred rent amounts. Similarly, the landlord continues recognizing rental income as usual and records a receivable for deferred payments.
• If the concession represents a change beyond the original enforceable rights or modifies lease terms, it is treated as a lease modification. This requires reassessing lease classification and remeasuring lease liabilities and right-of-use assets as of the modification date.

Accounting Methods for Rent Concessions

For non-modification concessions such as rent deferrals, lessees can choose between recognizing the deferred amounts as a liability (payable) or as variable lease payments recognized when they accrue. Lessor accounting similarly depends on whether the concession constitutes a modification or variable rent.

It is also important to maintain accurate records of all rent invoices, including those reflecting concessions, to support financial reporting and audit requirements.

Compliance and Legal Considerations

Stay informed of local laws that might regulate rent concessions to avoid potential legal issues, as some jurisdictions limit types and amounts of allowable concessions. Ensure compliance with applicable lease accounting standards and keep thorough documentation to prove adherence to those frameworks.

Disclosure and Transparency

Both tenants and landlords should provide clear disclosures regarding rent concessions in financial statements and lease accounting reports to help auditors and regulators understand the impact of these concessions on reported lease liabilities and rental income.

Summary

Properly recording rent concessions or waivers requires detailed lease documentation, understanding whether the concession represents a lease modification, applying the correct accounting treatment, and maintaining accurate rent invoices. Following these steps ensures accurate financial reporting and compliance with accounting standards.