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IFRS 16 Leases contains detailed guidance on how to account for lease modifications. A lease modification is defined as a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.

A lease liability should be remeasured on the effective date of the reassessment event or modification (the date that the modification is approved by both the lessee and lessor) as if the lease were a new lease that commences on that date.

Reassessments are required when an event does not involve renegotiating the lease terms and conditions, but when facts, assumptions, or other circumstances change. For example, a lessee may change their decision about exercising an option within a lease.

Application to lease accounting Since a lessee's lease liability is a monetary item, the liability is translated using a current exchange rate at the end of each reporting period and foreign exchange differences are recognised in profit or loss.

1 Lessee accounting for foreign currency leases - after ASC 842. A lessee classifies a lease as either a finance or operating lease based on the criteria prescribed in ASC 842, Leases. One of those criteria requires reporting entities to determine the present value of the lease payments.

Remeasurement of the lease liability This occurs when the lessee reassesses whether it is reasonably certain to exercise an option to extend the lease or to purchase the underlying asset, or not to exercise an option to terminate the lease early.

Accounting for a finance lease has four steps: Record the present value of all lease payments as the cost of the lease. Record only the interest portion of each payment as an expense. Depreciate the recognised cost of the asset over its applicable life. Recognise the asset's disposal upon its retirement.