Lease Modification, as per IFRS 16 refers to CHANGES made to the terms and conditions of a lease contract after its inception.
These changes can result from negotiations between the LESSOR and the LESSEE or due to changes in laws and regulations. For example, lease modifications include changes in lease term, changes in rent payments, and changes in the scope of the lease.
Table of Contents
Lease Modification – Background As Per IFRS 16
IFRS 16 is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) in 2016. It provides a single, principles-based framework for the accounting of leases, which was previously addressed by two separate standards. This standard applies to all lease contracts EXCEPT for short-term leases (leases with a term of less than 12 months) and leases of low-value assets.
One of the SIGNIFICANT changes introduced by IFRS 16 is the recognition of leases on the balance sheet of lessees. This means that lessees are required to recognize a right-of-use (ROU) asset and a lease liability for all leases, EXCEPT for short-term and low-value leases.
Lease Modification – Accounting
The Accounting Treatment of lease modifications, as per IFRS 16, depends on whether the modification is considered a Separate Lease or a Change to an Existing Lease.
1. Separate Lease
If the MODIFICATION is considered a separate lease, the lessee is required to account for the lease as if it were a new lease, starting from the effective date of the modification. The lessee should APPLY the principles of IFRS 16 to the new lease, including recognizing a new ROU asset and a new lease liability. The lessee should also REMEASURE the lease liability, taking into account the effect of the new lease terms and conditions.
2. Change to an Existing Lease
If the MODIFICATION is considered a change to an existing lease, the lessee should APPLY the change accounting guidance in IFRS 16. The lessee should reassess whether the lease is still a lease, and if it is, the lessee should RE-ASSESS the lease classification and the lease term.
The lessee should also reassess the lease liability, taking into account the effect of the modification. This includes adjusting the lease liability for any changes in rent payments and any other changes to the terms and conditions of the lease. The lessee should also RECOGNIZE any lease modifications in Profit or Loss (P&L) and make any necessary adjustments to the ROU asset.
The Bottom Line
Lease Modification can result in SIGNIFICANT changes to a lessee’s balance sheet and income statement. Lessees should be MINDFUL of the accounting treatment of lease modifications and ensure that they apply the appropriate guidance in IFRS 16.
Lessees should also carefully consider the implications of lease modifications on their financial statements, including the impact on the Recognition and Measurement of lease liabilities and ROU assets.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)