Adjust Line Lease For Free

Broadly speaking, a lease modification is accounted for in one of two ways: 1. It is treated as a separate lease (IFRS 16.44); or 2. It is not treated as a separate lease (IFRS 16.45-46).

If the original lease is an operating lease, the lessor accounts for the modification as a new lease from the effective date of the modification, including any prepaid or accrued lease payments relating to the original lease in the lease payments for the new lease.

Lease liabilities on the balance sheet skyrocket after the transition.Because ASC 842 requires the recognition of a right-of-use (ROU) asset and a lease liability, the addition of operating leases to the balance sheet is the primary contributing factor to this increase.

By capitalizing an operating lease, a financial analyst is essentially treating the lease as debt. Both the lease and the asset acquired under the lease will appear on the balance sheet. The firm must adjust depreciation expenses to account for the asset and interest expenses to account for the debt.

If the modified terms of the lease agreement reduce the lessee's rights to the underlying asset(s), then it is accounted for as a partial or full termination. If the lease modification fully relinquishes the lessee's rights to the underlying asset(s), the lessee accounts for the modification as a full termination.

Lease agreements may include rent abatements, allowances, and/or escalations. However, the general theory of calculating the straight-line rent expense for a particular contract will remain constant: sum the total net lease payments and divide by the total number of periods in the lease.

Adjust the monthly straight-line amount for the remaining period by the amount of the monthly increase. For example, if your monthly payment was $1500 and increased by $150 per month, you should record $1,650 per month going forward.