IFRS 16 introduces a single lessee accounting model that requires a lessee to recognize assets (right-of-use asset) and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Referring to Basis for Conclusion of IFRS 16 (Para BC100), low-value asset is the asset whose value, when new, is USD 5,000 or less.

Summaries of key accounting treatments will be addressed in another article, in this article lease modification is mainly focused.

What is defined as a lease modification?

IAS 17 (old version of standard guides on leases) did not address matter of lease modification. However, lease modification often incurs in practices, therefore in version of IFRS, IASB decided to add in.

A lease modification is a change in scope of a lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term), or the consideration for a lease, that was not part of the original terms and conditions of the lease. [Par. BC 201 – Basis for Conclusions on IFRS 16].

=> Therefore it can be briefly defined that a lease modification can be either:

- Change in scope of current lease (underlying asset or lease term)

- Change in considerations (lease payment) of current lease which was not previously included in the primary terms of lease contract.

How to account for a lease modification?

When there is a lease modification, it is accounted for as a separate asset if the modification increases the scope of the lease by adding the right to use one or more underlying assets as following [IFRS 16.44]:

Otherwise, lease modification will be recorded as adjustment to right-of-use assets and lease liabilities of the existing lease. [Par IFRS 16.45 and IFRS 16.46].

When accounting for lease modification, the lessee is required to use revised discounting rate which is effective on the date of modification. It can be either interest rate implicit in the modified contract or incremental borrowing rate of a similar loan effective on the modification date.

Changes in lease payments vs. lease modification?

Is change in lease payments exactly same as lease modification? The answer is NO.

Because there are some changes in lease payments which are not lease modification. Relation between two categories is illustrated in the following diagram:

BC201 of the Basis for Conclusion of IFRS 16 said that:

“In defining lease modifications, IASB differentiated between scenarios resulting in the remeasurement of existing lease assets and lease liabilities that are not lease modifications (for example, a change in lease term resulting from the exercise of an option to extend the lease when that option was not included in the original lease term) and those resulting in a lease modification (for example, a change in the lease term resulting from changes to the terms and conditions of the original lease).”

Discounting rate to be used when recording changes in lease payments

When there is change in lease term or scopes of underlying assets, a revised discounting rate effective as of changing date should be used. It is regulated in [IFRS 16.40] and in [IFRS 16.41] as following:

There are 02 cases in which unchanged discounting rate must be used when there is change in lease payments. It is regulated in [IFRS 16.42] and in [IFRS 16.43] as following:

02 cases in Par. 42 can be distinguished from other cases that there is no change in lease term of those cases and therefore discounting rate should be kept unchanged.

[Conclusion] When there is a change in lease payments, the lessee is required to re-measure lease liabilities and record those changes in right-of-use assets and lease liabilities. In those cases, discounting rate must be revised or kept unchanged depends on nature of each case as aforementioned.

References:

- Basis for Conclusion of IFRS 16

- IFRS 16 - Leases