Accounting for Lease Modifications
Lessees generally account for rent concessions as a lease modification when the definition of a lease modification is met, and the amendment to IFRS 16 is not applied. However, in the circumstances involving voluntary forgiveness of a lease liability granted by the lessor without other changes to the lease, it might also be reasonable for the lessee to account for such rent concession as a (partial) derecognition of a lease liability applying paragraph 3.3.1 of IFRS 9 Financial Instruments with a credit to profit or loss (i.e., rather than applying the IFRS 16 amendments or the IFRS 16 lease modification guidance). Therefore, diversity in practice may exist in this situation, and it is essential to consider the perspective of the local regulator. Lessees should apply their policy (i.e., IFRS 16 or IFRS 9) consistently to contracts with similar characteristics and in similar circumstances.
A lease modification that increases the lease’s scope and the consideration by an amount commensurate with the stand-alone price is accounted for as a separate lease. For a lease modification that is not accounted for as a separate lease, a lessee applies modification accounting at the effective date of the lease modification. In such a case, a lessee allocates the consideration in the modified contract to the lease and non-lease components (where applicable), determines the lease term of the modified lease, and remeasures the lease liability by discounting the revised lease payments using a revised discount rate determined on that date. The revised discount rate is the rate of interest implicit in the lease for the remainder of the lease term, or if that rate cannot be readily determined, the lessee’s incremental borrowing rate.
If the modification decreases the scope of the lease (e.g., a change that reduces total leased space or shortens the lease term), the lessee remeasures the lease liability and reduces the right-of-use asset to reflect the partial or complete termination of the lease (e.g., a 50% reduction in leased space would reduce the right-of-use asset by 50%). Any difference between those two adjustments is recognized in profit or loss at the effective date of the modification. For all other modifications, the lessee recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset without affecting profit or loss.
Lessor accounting for lease modifications depends on the classification of the lease. A lessor accounts for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. A lease modification to a finance lease that increases the lease’s scope and the consideration by an amount commensurate with the standalone price is accounted for as a separate lease. For a modification to a finance lease that is not accounted for as a separate lease:
- If the lease would have been classified as an operating lease, had the modification been in effect at the lease inception date, the lessor accounts for the lease modification as a new lease from the effective date of the modification and measures the carrying amount of the underlying asset as the net investment in the lease immediately before the effective date of the lease modification.
- Otherwise, the lessor accounts for the net investment in the lease by IFRS 9.
Sources:
- Google Image. (2022).
- Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.
- IFRS. (2022). IFRS 9 Financial Instruments. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/
- IFRS. (2022). IFRS 16 Leases. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-16-leases/