Operating lease modifications

Learning objectives

• Calculate the straight-line income of a modified operating lease, accounted for as a new lease from the effective date of the modification, including prepaid or accrued lease payments.L2, L3

Normative references

• IFRS 16 §87The lessor accounts for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease.

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

6 questions

• How does a lessor account for a modification to an operating lease?L2
• On 1 January 20X1, Fontaury leased out a hangar under an operating lease for {original_term} years: the first year is free, then the lessee pays {annual_rent} at the beginning of each of the following four years. Income is recognised on a straight-line basis. On 1 January 20X3, the parties modify the lease: from that date, the payment is {new_annual_rent} a year, payable in advance, for a remaining term extended to {new_remaining_term} years. Compute the accrued income balance at 31 December 20X2 and the annual lease income to be recognised from 1 January 20X3.L2
• On 1 January 20X1, Altimar leases a fleet of electric bicycles to a local authority under an operating lease for {original_term} years. The lessee paid a non-refundable upfront fee of {upfront_payment} on signature, then pays {annual_rent} at the beginning of each year. Altimar recognises income on a straight-line basis. On 1 January 20X3, the payment for the four remaining years is reduced to {new_annual_rent}, payable in advance, with no change in term. Compute the balance of lease payments received in advance at 31 December 20X2 and the annual lease income from 1 January 20X3.L3
• Dunemer has leased out a storage terminal under an operating lease since 1 January 20X1, for four years, with stepped payments due each 1 January: {rent_y1}, {rent_y2}, {rent_y3} then {rent_y4}. On 1 January 20X3, at the lessee's request, the lease is extended by two years and the payment becomes fixed at {new_annual_rent} a year, payable in advance, for the four remaining years. Determine accrued income at 31 December 20X2 and the annual lease income of the modified lease.L2
• The lessor Sorgues has leased out a warehouse under an operating lease. At the beginning of the fourth year, it agrees to a lower payment in exchange for an extension of the lease. At that date, Sorgues' statement of financial position shows accrued income arising from straight-lining. The finance director hesitates between several treatments. Which one complies with IFRS 16?L3
• An operating lease of Valcresse is modified with effect from 1 January 20X4. At that date, accrued income from straight-lining the original lease amounts to 12,000. The modified lease provides for four annual payments of 33,000, payable in advance. A team member proposes recognising 33,000 of income a year. What annual lease income should be recognised?L3