The CECRA program is targeted toward managing the financial disruption that commercial property owners and some of their tenants are facing as a result of COVID-19. Under the CECRA program for the months of April 2020 to September 2020, a small business tenant’s rent would be reduced by at least 75%, with the property owner forgiving at least 25% of the rent and the program covering 50% of the rent as a forgivable loan, to be forgiven on December 31, 2020. This will affect the accounting of both the landlord and the small business tenant. This article will explore both the lessor (landlord) and lessee (tenant) accounting under Accounting Standards for Private Enterprises (ASPE).
Lessor Accounting
For the landlord, there are two items to consider relating to CECRA: how to account for the decrease in rental income from the tenant and how to account for the government assistance received.
As consistent with ASPE Section 3065 (Leases), a landlord accounts for operating leases on a straight-line basis over the term of the lease. One of the conditions of the CECRA program is a requirement of the landlord to sign a rent reduction agreement with each of the small business tenants that reduces the rent by at least 75% for the specified months. Since the rent reduction agreement reduces the total rent payable by the tenant over the term of the lease, the straight-line calculation will have to be adjusted to reflect the decreased straight-lined rental revenue to recognize on a monthly basis.
In accordance with ASPE Section 3800 (Government Assistance), a forgivable loan received from the government is to be recognized in revenues “when the enterprise becomes entitled to receive it” (3800.24) and not at the time the loan is forgiven. The same handbook section also discusses the appropriateness of using accrual accounting in recording government grants when there is reasonable assurance that the landlord “has complied and will continue to comply with the conditions for receipt of the government assistance”(3800.26). Since this is a new program and there is no past history to indicate assurance of receipt of this assistance, the accrual can be recorded once the landlord receives approval of their CECRA application and allocated on a straight-line basis over the related months. The Canada Mortgage and Housing Corporation (CMHC) has engaged MCAP to deliver CECRA and notes on its website that notification of the application decision will occur within two weeks of submission.
Lessee Accounting
In accordance with ASPE Section 3065, the lessee also accounts for its operating lease on a straight-line basis over the term of the lease. As such, the reduction in rent payable for April to September 2020 will result in a change to the straight-lined monthly rent amount expensed to the end of the lease. Furthermore, the statement of earnings or note disclosure should document the amount of rent forgiven.
The above is general guidance and may not be appropriate for all situations. To discuss your unique situation, please connect with one of our team members.
