Reference no: EM133326715
Case: Gaines operates various types of retail stores across the United States, including grocery stores, pharmacies, electronics sales stores, and gaming equipment stores. While most of the stores are in stand-alone buildings, some are located in large shopping centers. All retail space is leased from public and private real estate companies (i.e., W is a lessee).
In early 2020, the coronavirus disease 2019 ("COVID-19") pandemic began to negatively affect almost every industry, directly or indirectly, in the United States. To mitigate the spread of COVID-19, federal, state, and local governments ordered closures of nonessential businesses and mandated residents to stay at home.
As a result, W was forced to temporarily close some of its stores categorized as nonessential (e.g., electronics and gaming equipment stores). W's other stores that are deemed essential (e.g., grocery stores and pharmacies) remained open but were adversely affected because of decreased customer foot traffic and higher operational costs because of increased sanitization protocols.
To manage mounting costs and negative cash flows, W requested and received the following rent concessions from its landlords in June 2020:
• Electronics sales stores - Abatement of three months' rent for the period beginning July 1, 2020.
• Gaming equipment stores - Deferral of three months' rent for the period beginning July 1, 2020, to be repaid in equal installments over the last six months of calendar year 2021.
• Grocery stores - Abatement of three months' rent for the period beginning July 1, 2020, along with an extension of the lease term by 12 months. The rent to be paid over the extended term will be based on market rates.
• Pharmacies - No concessions.
For the purpose of its calendar year 2020 financial reporting and periods thereafter, W is analyzing its eligibility under and application of the FASB's April 10, 2020, Staff Q&A (FASB Staff Q&A-Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the
COVID-19 Pandemic) (the "Staff Q&A"), which provides guidance on accounting for COVID-19-related rent concessions.
Key Facts and Assumptions
• gaines has adopted ASC 842, Leases, before 2020.
• All of gaines leases are accounted for as operating leases.
• Contractual rent (before concession) for each group of leases taken together is as follows:
o Electronics sales stores - $10,000 per month.
o Gaming equipment stores - $10,000 per month.
The right-of-use (ROU) asset and lease liability balances on July 1, 2020, for each group
of leases taken together are as follows:
o Electronics sales stores: Lease liability - ($180,000). ROU asset - $180,000.
o Gaming equipment stores: Lease liability - ($180,000). ROU asset - $180,000.
• There are no rent escalations under any of the lease contracts.
• None of the leases have an existing clause related to rent concessions in the event of a pandemic or similar circumstance.
• All the concessions are as a result of a direct negative impact of COVID-19.
• There were no prior rent concessions with respect to any of the leases subject to the COVID-19 concessions described above.
• No other terms or conditions in the original lease agreements were modified along with the rent concessions.
Explanation of issues: Identify the key concept
• Analysis: Use the appropriate FASB Codification
• Logical conclusion: An answer should be based on the interpretation/application of the FASB Codification
• Completeness and format: Business memo (page 1) and the supporting analysis and explanation (page 2 ~ page 4 or 5)
• Grammar and style'
Required:
1. Are any or all of the rent concessions eligible for the relief provided in the Staff Q&A?
2. If eligible, how should Gaines apply the guidance in the Staff Q&A to the various rent concessions obtained (i.e., can Gaines apply the relief guidance to some of the eligible concessions but not others)?
3. If Gaines plans to apply the guidance in the Staff Q&A, how should it account for each of the rent concessions?
also Apply the Q&A with the FASB Codification (ASC 840 and ASC 842) to three different lease assets.
- Q1: Try to identify whether the lease concession under the Staff Q&A to applicable to three different lease stores.
- Q2 & Q3: Based on your answer of Q1, you can discuss how the concession guideline can work for eligible lease stores.