Manipulate Table Lease For Free

Per ASC 842-10-25-8, an entity shall account for a modification to a contract as a separate contract (that is, separate from the original contract) when both of the following conditions are present: The modification grants the lessee an additional right-of-use not included in the original lease.

Account for the lease modification as a termination of the original lease and creation of a new lease from the effective date of the modification. Measure the carrying amount of the underlying asset as the net investment in the original lease immediately before the effective date of the modification.

Lease modification: 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 (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term).

A modification of a lease may result in a partial termination of the lease. Examples of events that result in a partial termination include terminating the right to use one or more underlying assets and decreasing the leased space. A decrease in lease term is not considered a partial termination event.

At the termination of a lease, the ROU asset and its associated lease liability are removed from the lessee's books. The difference between the ROU asset and the lease liability is accounted for as a profit or loss at that time.

Use Case: A decrease in the scope of a lease can also be referred to as a partial termination. It removes the right to use one or more underlying assets, or shortens the contractual lease term. An example of this is reducing the amount of square footage rented in a building.

The agreement to extend the lease is a modification because it was not contemplated in the original terms of the lease. Since the modification does not add the right to use one or more underlying assets, it does not meet the criteria in IFRS 16.44(a) to be accounted for as a separate lease.