15. Lease modification and reassessment

Lease modifications are common, like in situations where the business needs to downsize and renegotiate lease contracts or where a lease is negotiated to end earlier, so that a new asset can be leased, or in a situation where a lease agreement is extended beyond the original contract.

There’s guidance in IFRS 16, as well as, in auditor’s publication, like the one from KPMG that can be located here:

https://home.kpmg/content/dam/kpmg/xx/pdf/2018/09/lease-modifications-2018.pdf

Please note that IFRS 16 distinguishes between lease modifications that represent, in substance, the creation of a new lease that is separate from the original lease and the changes that represents the change in scope, of consideration paid for an existing lease (Reassessment).

  • A separate lease needs to be accounted for as a new lease from the effective date of the modification
  • An adjustment of the existing lease contract needs to remeasure the initial lease

While registering lease reassessment is pretty straight forward in Share Control, lease modifications can be more complicated in terms of correct accounting. We encourage you to follow the guidance below in a situation where you have agreed to new terms that are not a part of the existing lease contract. Please note that a lease modification can involve both a termination of an existing contract and a registration of a new contract.

Key concepts:

Reassessments (IFRS 16 39-43)

Reassessments are reassessment of estimates used in the accounting of a contract. Examples are:

  • Assessment of the lease term (Such as, exercising an option to extend the contract).
  • Assessment of whether a purchase option will be exercised.
  • Expected amount payable under a residual value guarantee.
  • Future lease payments from a change in the index or rates used to determine those payments.
  • Lease payments resulting from a change in floating interest rate.
  • Variable lease payments becoming fixed or in-substance fixed payments.

The table below summarized the impact of changes (Source: KPMG publication Lease modification):

What is a lease modification? (IFRS 16 44-46 and 79-80)

A lease modification is a change in the scope of a lease, or the consideration for a lease that’s not part of its original term and conditions.

  • Increasing the scope of the lease by adding the right to use to one or more underlying assets.
  • Decreasing the scope of the lease by removing the right to use to one or more underlying assets or by shortening the contract term (This is the most complicated situation).
  • Increasing the scope of the lease by extending the contractual lease term (that is not a part of the original contract).
  • Changing the consideration in the lease by increasing or decreasing the lease payments.

All changes that result in changes to the terms of the original contract are considered lease modifications.

The difference between a contract that shall be accounted for as a separate lease or not is important for the registration in ShareControl. A contract that’s a separate lease must be recorded as a separate contract in ShareControl, with a start date equal to the commencement date of the lease. If the contract is not a separate lease, the change should be recorded as a part of the original contract, using the change log. The effect will be recorded at the date of entering the new contract and not the date of the commencement of the lease.

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