![]() ![]() At the beginning of Year 4, LE and LR agree to reduce the space to 3,000 sq.No initial direct costs, lease incentives or dismantlement costs.Īt lease commencement, LE records an ROU asset and lease liability of $386,087, which is the present value of the 10 annual payments of $50,000 using the 5% incremental borrowing rate.Incremental borrowing rate at lease commencement was 5% the rate implicit in the lease was not readily determinable.Lease payments are $50,000 per year payable in arrears.Lessee LE entered into a 10-year lease for 5,000 sq.In those cases, the modification would not be accounted for as a separate lease.Įxample – Modification that decreases scope In a different scenario, assume that the annual lease payments remained unchanged from the original lease or were increased by an amount that was not commensurate with the stand-alone price for the additional office space (e.g. equivalent to the stand-alone price for the increase in scope), LE accounts for this modification as a separate lease. Because the lease payments for the additional right of use are commensurate with the market rental price for similar office space leases (i.e. This modification increases the scope because it grants LE the right to use an additional floor of office space. The lease of the additional office space was not part of the original terms and conditions of the contract. The lease payments for the additional office space are $100,000 per year, which is commensurate with the market rental price for similar office space. At the beginning of Year 6, LE and LR agree to amend the contract to grant LE the right to use an additional floor of office space in the same building for 5 years. LE’s business has since expanded and LE now requires additional office space. Lessee LE entered into a lease with Lessor LR to lease one floor in an office building for 10 years. ![]() 1Įxample – Increase in scope with corresponding increase in consideration Lease modifications are defined similarly under US GAAP. reducing building space subject to a lease, while simultaneously extending the term of the lease for the remaining space. Often, more than one modification will occur simultaneously – e.g. ![]() increasing or decreasing the lease payments.shortening or extending the contractual lease term and.adding or removing the right to use one or more underlying assets.Example lease modifications include (but are not limited to): IFRS 16 defines a lease modification as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.” A lease modification results from renegotiations between the lessee and lessor. In this article, we outline the lease modification guidance in IFRS 16, compare it to US GAAP, and describe the lessee and lessor accounting for common types of lease modifications. Lease modifications are common and accounting for them can be complicated. Although companies may have dealt with lease modifications at transition, modifications that take place after transition are a key ‘Day 2’ aspect of the new standard for both lessees and lessors. From the IFRS Institute – August 30, 2019Ĭompanies have been busy implementing the new leases standard (IFRS 16), with a particular focus on transition and the Day 1 accounting. ![]()
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