Attention to the accounting treatment in the wake of the coronavirus (ⅠⅠ)

(Continued from the previous article)

3. How to measure correctly rent expenses based on rent relief policy

During the period of coronavirus lockdown control management, although companies stop working and producing, it does not prevent the fulfillment of rent payment obligations.

Many cities across the country have introduced some rent relief policies. Of course, policies vary from region to region. For example:

• “Manufacturing small and micro enterprises, small and micro enterprises in the service industry, individual entrepreneurs and private schools to rent the housing of each funded enterprise and its state-owned, state-controlled enterprises, state-owned enterprises under effective control, the territory is classified as a high-risk area in the epidemic in 2022, 6 months of rent will be waived in 2022.” for some cities;
• “Exempting 3 months of rent and then reducing the rent by half for 3 months.” for other cities.

Since the relief policy varies from region to region, we will use the example of “6 months of rent relief granted by the state” for our analysis.

Accounting Method 1

In accordance with the basic requirements of accounting standards, the rent being reduced should be considered as a deduction from the total amount of rent for the entire contract period. If the calculation of expenses already incurred previously does not need to be changed, the deduction is made within the total amount remaining payable and re-amortized on a monthly basis.

For example, Company A leases an office for 24 months with a monthly rent of CNY 6,000. In the seventh month, the state grants a six-month rent reduction, so in effect, no rent is payable for the seventh through twelfth months. However, the company accountant still needs to accrue the apportioned rent expense of CNY 4,000/month = [18 months (remaining lease term) * 6,000 – 36,000 (rent reduction)] /18 months, in accordance with the accounting standards.

Through this method, although there is a difference between the monthly rent payment and the actual rent accrual, and the difference will be pending until the rent contract expires, this method can reflect the rent expense every month, which is beneficial to the enterprise to do accounting or financial analysis and management and is beneficial to the enterprise’s budget management.

Accounting Method 2

On June 19, 2020, the Ministry of Finance issued the «Notice of the Provisions on the Accounting Treatment of the COVID-19 Pandemic-related Rental Concessions»[1]. It specifies the provisions for accounting for rent concessions related to the coronavirus outbreak: allowing companies to no longer apportion the measurement in accordance with the original accounting standards. This provision also takes into account the International Financial Reporting Standards (“IFRS”).

For operating leases, the lessee should continue to charge the original contract rentals to the cost of the relevant assets or expenses in the same way as before the relief policy. In the case of a lessee with a rent reduction, the reduced rent should be treated as contingent rent and charged to “manufacturing expenses”, “administrative expenses” and “selling expenses” in the period of reduction.

For operating leases, the lessor should continue to follow the same method as before the relief policy: the original contract rent is recognized as lease income. In the case of a lessor with a rent reduction, the reduced rent should be treated as contingent rent and the lease income is eliminated in the period of reduction.

This method is easy to understand, but inconvenient for budget management and later financial analysis. It is worth mentioning that companies should choose a method to reasonably measure the portion of a rent reduction, and it cannot be changed at will once it is confirmed.

4. Can revenue during the lockdown control management be counted as “income”, even if it is not invoiced in a timely manner?

According to the New Accounting Standard – Revenue Recognition, you may refer to our previous article through the link: New Accounting Standard in China- Revenue Recognition | A New Revenue Standard SONG (serviceonnewgrounds.com), enterprises should recognize revenue from sales according to a time period or a point in time, not according to whether or not an invoice is issued. In short, the differences between a time period and a point in time is that: 1) the customer enjoys an economic benefit at the same time as the performance; 2) the customer has control over the commodity; 3) an irreplaceable use of the commodity is generated.

Thus, if the only basis for revenue recognition is the original invoice, it will be contrary to the actual economic operations of the enterprise and will not be truly reflected in the accounting statements of the enterprise, which will never lead to biased decision-making by management.

The above are just a few points that come to mind for managers and accountants who are prone to errors in accounting bookkeeping during the period of coronavirus lockdown control management. Especially now that we are in the audit period of 2022, making the necessary accruals or adjustments before the audit will not result in inflated profits and overpayment of corporate income tax and, at the same time, will facilitate the smooth implementation of the 2022 audit.

Should you have any further questions, please feel free to contact us.

[1] http://www.gov.cn/zhengce/zhengceku/2020-06/24/content_5521488.htm