Lease modifications (lessee)

Learning objectives

• Determine whether a modification is a separate lease (addition of a right to use and an increase in consideration commensurate with the adjusted stand-alone price).L3
• Calculate, for a modification that is not a separate lease, the new lease liability at the revised rate and its effect: a proportionate reduction of the right-of-use asset and a gain or loss when the scope decreases, otherwise an adjustment to the right-of-use asset.L3, L4

Normative references

• IFRS 16 §44A modification is accounted for as a separate lease if it increases the scope of the lease by adding the right to use one or more underlying assets and the consideration increases by an amount commensurate with the stand-alone price for the increase in scope, adjusted as appropriate to reflect the circumstances of the contract.
• IFRS 16 §45For a modification not accounted for as a separate lease, at the effective date of the modification the lessee (a) allocates the consideration in the modified contract (paragraphs 13-16), (b) determines the lease term of the modified lease (paragraphs 18-19) and (c) remeasures the lease liability by discounting the revised lease payments using a revised discount rate: the interest rate implicit in the lease for the remainder of the lease term if readily determinable, otherwise the incremental borrowing rate at the effective date.
• IFRS 16 §46For a modification not accounted for as a separate lease, the lessee (a) decreases the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease where the scope decreases, recognising in profit or loss the related gain or loss; (b) makes a corresponding adjustment to the right-of-use asset for all other modifications.
• IFRS 16 §104The lessee applies paragraphs 105 and 106 to all lease modifications that change the basis for determining future lease payments as a result of interest rate benchmark reform. These paragraphs apply only to such modifications.
• IFRS 16 §105As a practical expedient, the lessee accounts for a modification required by IBOR reform by applying paragraph 42 (remeasuring the lease liability on the basis of the revised payments), and not as a lease modification under paragraphs 44-46. A modification is required by the reform only if it is necessary as a direct consequence of the reform and the new basis for determining the lease payments is economically equivalent to the previous basis.
• IFRS 16 §106When, in addition to the modifications required by IBOR reform, other modifications are made at the same time, the lessee applies the general requirements of the standard to all of those modifications, including those required by the reform.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

9 questions

• Pélican leases two floors of a building. It obtains from the lessor the lease of a third floor for the remaining term, for an additional payment equal to the rental price of a comparable floor, less the marketing costs the lessor will not incur. How does Pélican account for this modification?L3
• The Ardelle firm leases an office floor. Halfway through, it leases an additional floor in the same building for the remaining term, with an additional payment 30% below the price charged for comparable space; no circumstance specific to the contract justifies this discount, granted to retain a major tenant. What is the appropriate treatment at the effective date of the modification?L3
• Ostral leases a hangar; {rents_remaining} annual payments of {rent} remain, paid at year end, and the lease liability amounts to {liability_before} (original rate {original_rate}). The lease contains no extension option. On 1 January 20X5, Ostral and the lessor sign an amendment adding {added_years} years at the same rent; it does not cover any additional asset. The interest rate implicit in the lease cannot be readily determined; Ostral's incremental borrowing rate at the effective date is {ibr_effective_date}. Compute the modified lease liability and the adjustment to the right-of-use asset (rounded to the nearest euro).L3
• The logistics provider Verlaine leases a fleet of forklift trucks. To secure its equipment during a multi-year customer contract, it negotiates with the lessor an extension of the lease by {extension} years, at the same annual payment of {annual_payment} made at year end, with no additional truck. Before the amendment, {payments_due} payments remained and the lease liability was {carrying_liability} (initial rate {initial_rate}). The incremental borrowing rate at the effective date is {revised_rate}, the implicit rate not being determinable. Determine the modified lease liability and the adjustment to the right-of-use asset (rounded to the nearest euro).L4
• Mirabel leases {total_area} m² of offices. On 1 July 20X4, an amendment allows it to return {area_returned} m² for the remaining term; the remaining payments are reduced in the same proportion. At that date, the right-of-use asset has a carrying amount of {rou_carrying} and the lease liability of {liability_carrying}. Case data: the interest rate implicit in the lease cannot be readily determined and Mirabel's incremental borrowing rate at the effective date happens to equal the original rate; Mirabel measures the partial termination in proportion to the area returned (method chosen for the case). Compute the decrease in the right-of-use asset, the modified lease liability and the gain or loss.L4
• The Coralis printing company leases {machines_leased} identical rotary presses under a single lease. At the end of 20X3, an amendment terminates the lease of {machines_returned} press for the remaining term and reduces the remaining payments proportionately. Just before the amendment, the right-of-use asset is {rou_value} and the lease liability {liability_value}. Case data: the implicit rate cannot be determined; Coralis's incremental borrowing rate at the effective date, used as the revised rate, equals the original rate; the partial termination is measured in proportion to the number of presses (method chosen). Compute the decrease in the right-of-use asset and the gain or loss on the modification.L4
• The Bastide retail chain returns to the lessor, by amendment, {share_terminated} of the sales area of a store for the remaining term, the remaining payments decreasing in the same proportion. Before the amendment, the right-of-use asset is {rou_before} and the lease liability {liability_before}. Case data: the revised rate at the effective date equals the original rate, so the liability also decreases by {share_terminated}; the partial termination is measured in proportion to the area (method chosen). Record the modification entry (decrease posted directly to the right-of-use asset account).L4
• The caterer Ferrand leases {vehicles_total} identical refrigerated trucks under a single lease. An amendment terminates the lease of {vehicles_returned} truck for the remaining term, with a proportionate decrease in the remaining payments. Just before the amendment, the right-of-use asset amounts to {rou_balance} and the lease liability to {liability_balance}. Case data: the implicit rate cannot be determined; the incremental borrowing rate at the effective date, used as the revised rate, equals the original rate; the partial termination is measured in proportion to the number of trucks (method chosen). Record the entry (decrease posted directly to the right-of-use asset account).L4
• The Hélianthe group leases a data centre. An amendment signed in 20X4 adds an adjacent server room for the remaining term and extends the lease by 3 years; the total rent increases, but the increase attributable to the new room is about 20% below the prices observed for comparable rooms, with no particular circumstance of the contract to explain it. Write a memo to the audit committee analysing how Hélianthe should account for this amendment and the documentation to be gathered.L4