Finance lease modifications

Learning objectives

• Determine the treatment of a modification to a finance lease: a separate lease, a new operating lease based on the net investment, or application of IFRS 9.L3, L4

Normative references

• IFRS 16 §79The lessor accounts for a modification to a finance lease as a separate lease if both conditions are met: the modification 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 §80If the modification is not a separate lease: if the lease would have been classified as an operating lease had the modification been in effect at the inception date, the lessor accounts for it as a new lease from the effective date of the modification and measures the carrying amount of the underlying asset as the net investment immediately before that date; otherwise, it applies IFRS 9.

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

3 questions

• Nordhal, a lessor, leases three laser cutting machines to a manufacturer under a finance lease. During the lease, the parties agree to add a fourth machine; the consideration increases by an amount commensurate with the stand-alone price of this additional machine, adjusted to reflect the circumstances of the contract. How does Nordhal account for this modification?L3
• Estrel, a shipowner and lessor, leases a support vessel under a finance lease. On 1 July 20X3, the parties substantially shorten the lease term, without adding any asset. Estrel's documented analysis concludes that, had this modification been in effect at the inception date, the lease would have been classified as an operating lease. Immediately before the effective date of the modification, the net investment amounts to 180,000; the fair value of the vessel is estimated at 210,000. Which treatment complies with IFRS 16?L3
• Parvel, a lessor, has leased a tram set to a regional operator under a finance lease. Given the lessee's cash difficulties, the parties reschedule the remaining payments, without changing the scope of the lease or adding any asset. Parvel's team concludes that the lease would in any case have been classified as a finance lease had these new terms been in effect at the inception date. The financial controller proposes remeasuring the receivable as a lessee does for its lease liability. Which position do you defend?L4