In short
A lease modification is a change to a lease's terms that wasn't part of the original contract. It is a separate contract if it adds the right to use another asset at a price matching its standalone price; otherwise the lessee remeasures the lease liability.
Key takeaways
- The liability is remeasured using a discount rate updated at the modification date, with the same adjustment to the right-of-use asset.
- A partial termination reduces the asset proportionately, with any difference recognized as a gain or loss.
- Exercising an existing option isn't a modification but a reassessment.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?