Dispose Highlight Lease For Free

As can be seen from the diagram, a modification will only be treated as a separate lease if it involves the addition of one or more underlying assets at a price that is commensurate with the standalone price of the increase in scope. 1 All other modifications are not treated as a separate lease.

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.

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

A lease modification is a change to the terms and conditions of a contract resulting in a change to either the scope or consideration for a lease. This could be a change that either adds or terminates the right to use a portion or all of the underlying asset(s) or changes the lease term.

When a lease modification is accounted for as a new lease, the lessee accounts for the separate lease in the same way as any new lease, using a new discount rate. A lessee revises the discount rate when there is a modification that is not accounted for as a separate lease.

The company can make the journal entry for the operating lease by debiting the rent expense account and crediting the cash account. In this journal entry, there is no record of lease asset or lease liability in the balance sheet like those in the finance lease accounting.

A finance lease, also referred to as a capital lease or sales lease, is a type of commercial lease in which a finance company is the legal owner of an asset, and the user rents the asset for an agreed-upon period of time.