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A lessee should account for any direct costs, lease incentives, or other payments made by the lessee or lessor in connection with a lease modification in the same manner as those items would be accounted for in connection with a new lease.

A lessor's accounting for a lease modification depends on the type of modification made to the lease. Depending on the changes made to the lease contract, a lease modification can result in either a separate new contract (i.e., accounted for separate from the original contract) or a new modified contract.

A lease modification includes adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term. IFRS 16's lease modification guidance can be summarised into the diagram overleaf.

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.

Basically, It is a contract between two parties Lessor and Lessee, where the lessor is the one who purchases the goods or equipment while lessee is an individual who possesses that goods or equipment. That means lessee use that equipment for a specific purpose with some promises.

How to apply lease modification under ASC 840. Under ASC 840, a change in a lease other than to extend the lease terms requires that a test be performed to determine if a new lease has been created and, if so, a second test determines the accounting for that new lease.

So, as you form your lease, make sure to include each of these items: Parties to the Lease. List the name of the landlord and tenant bound to the agreement. Description of the Property. List the address of the property. ... Terms of Rent. ... Lease Term. ... Occupants. ... Security Deposit Information. ... Damages and Repairs. ... Pets.