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:

  1. The type of lease you entered into from a lessor or lessee’s perspective, and
  2. 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’:

Lessees ROU IFRS 16 Lease modification

Lessees 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.

IFRS 16 Lease modification

Lease modification

For all other leases, the scope must be considered in determining how to account for the change:

Lessors Finance IFRS 16 Lease modification

Lessors Finance Lease modification