IFRS 16 Lease modifications – The last few months forced many entities to renegotiate lease terms and review their current lease agreements – the question arises how and when to account for a new lease when the lease terms and/or lease payments have changed, or where it was determined that it is not a new lease but a lease modification.
IFRS 16 Lease modifications may result from any change in the lease term, lease amount or a change in the underlying asset (scope); for example, additional space rented, extending the lease term, etc.
Whether you will recognise a new lease* is really only determined by two things:
- The type of lease you entered into from a lessor or lessee’s perspective, and
- Whether the scope of the lease was increased together with a corresponding increase in the lease payments.
Changes to the corresponding lease assets and liabilities (net difference) is recognised in profit and loss.
*IFRS allows an exception to recognising a new lease for certain IFRS 16 Lease modifications due to COVID 19 (see May 2020 Tip)
Detailed below is the ‘Lessees: Right of Use (ROU) Lease modification’:
Lessors may recognise operating leases and lessees may recognise certain leases as short term and low value leases using the straight-line basis. Lease modifications to these leases will ALWAYS result in a new lease being recognised.
For all other leases, the scope must be considered in determining how to account for the change: