01 Feb 22
Lease Modifications
IFRS 16 Leases is the International Financial Reporting Standard for leases. It also contains guidance on how to account for lease modifications which are defined as a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. This may include the following:
adding or removing the right to use one or more underlying assets;
extending or shortening the contractual lease term; or
changing the consideration in the lease.
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At a high level, the standard allows for a lease modification to be accounted for in one of two ways:
It is treated as a separate lease; or
It is not treated as a separate lease.
Lease modifications are accounted for at the effective date of the lease modification. This is the date on which both parties agree to the lease modification and is usually when the modified contract is signed.
Lessee modifications
As noted above, a lease modification can be accounted for in one or two ways. A lessee would account for a lease modification as a separate lease if both of the following criteria are met:
the modification increases the scope by adding the right to use one or more underlying assets; and
the consideration increases by an amount equivalent to the stand-alone price for the increase in scope.
All other lease modifications would not be accounted for as a separate lease.
Lessor modifications
Under the accounting standards, there is separate guidance on the lessor accounting for lease modifications to finance leases and operating leases.
Finance leases
Similar to lessee accounting, a lessor would only account for a lease modification as a separate lease if both criteria are met:
the modification increases the scope by adding the right to use one or more underlying assets; and
the consideration increases by an amount equivalent to the stand-alone price for the increase in scope.
For all other modifications in finance leases that would not be accounted for as a separate lease, the lessor should first assess whether the classification of the lease would have been different if the modified terms had been in effect at the inception date. The accounting treatment would be different if the assessment resulted that the lease would have been treated as an operating lease or a finance lease, and if it was to be treated as a finance lease, the lessor would apply the rules under IFRS 9.
Operating leases
A lessor accounts for a modification to an operating lease as a new lease from the effective date of the modification.
COVID-19
There was an amendment made to IFRS 16 during COVID-19 which provided practical relief from IFRS 16’s requirements to lessees who were granted COVID-19-related recent concessions. This amendment permitted only lessees not to assess whether rent moratoriums occurring as a direct consequence of the pandemic are lease modifications and instead to account for those deferrals as if they are not lease modifications.
For further information on IFRS 16, lease modifications, or any accounting related issues, please feel free to contact Rolando Ebuna.