| Examples 15–19 illustrate the requirements of IFRS 16 regarding lease modifications for a lessee.
Example 15—Modification that is a separate lease |
---|
Lessee enters into a 10-year lease for 2,000 square metres of office space. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for the remaining five years to include an additional 3,000 square metres of office space in the same building. The additional space is made available for use by Lessee at the end of the second quarter of Year 6. The increase in total consideration for the lease is commensurate with the current market rate for the new 3,000 square metres of office space, adjusted for the discount that Lessee receives reflecting that Lessor does not incur costs that it would otherwise have incurred if leasing the same space to a new tenant (for example, marketing costs). | Lessee accounts for the modification as a separate lease, separate from the original 10-year lease. [Refer:paragraph 44] This is because the modification grants Lessee an additional right to use an underlying asset, and the increase in consideration for the lease is commensurate with the stand-alone price of the additional right-of-use adjusted to reflect the circumstances of the contract. In this example, the additional underlying asset is the new 3,000 square metres of office space. Accordingly, at the commencement date of the new lease (at the end of the second quarter of Year 6), Lessee recognises a right-of-use asset and a lease liability relating to the lease of the additional 3,000 square metres of office space. Lessee does not make any adjustments to the accounting for the original lease of 2,000 square metres of office space as a result of this modification. |
Example 16—Modification that increases the scope of the lease by extending the contractual lease term |
---|
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are CU100,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by four years. The annual lease payments are unchanged (ie CU100,000 payable at the end of each year from Year 7 to Year 14). Lessee's incremental borrowing rate at the beginning of Year 7 is 7 per cent per annum. | At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the lease liability based on: (a) an eight-year remaining lease term, (b) annual payments of CU100,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum. [Refer:paragraph 45] The modified lease liability equals CU597,130. The lease liability immediately before the modification (including the recognition of the interest expense until the end of Year 6) is CU346,511. Lessee recognises the difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability immediately before the modification (CU250,619) as an adjustment to the right-of-use asset. [Refer:paragraph 46(b)] |
Example 17—Modification that decreases the scope of the lease |
---|
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are CU50,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to reduce the space to only 2,500 square metres of the original space starting from the end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10) are CU30,000. Lessee's incremental borrowing rate at the beginning of Year 6 is 5 per cent per annum. | At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability based on: (a) a five-year remaining lease term, (b) annual payments of CU30,000 and (c) Lessee’s incremental borrowing rate of 5 per cent per annum. This equals CU129,884. [Refer:paragraph 45] | Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset on the basis of the remaining right-of-use asset (ie 2,500 square metres corresponding to 50 per cent of the original right-of-use asset). | 50 per cent of the pre-modification right-of-use asset (CU184,002) is CU92,001. Fifty per cent of the pre-modification lease liability (CU210,618) is CU105,309. Consequently, Lessee reduces the carrying amount of the right-of-use asset by CU92,001 and the carrying amount of the lease liability by CU105,309. Lessee recognises the difference between the decrease in the lease liability and the decrease in the right-of-use asset (CU105,309 – CU92,001 = CU13,308) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6). [Refer:paragraph 46(a)] | Lessee recognises the difference between the remaining lease liability of CU105,309 and the modified lease liability of CU129,884 (which equals CU24,575) as an adjustment to the right-of-use asset reflecting the change in the consideration paid for the lease and the revised discount rate. |
Example 18—Modification that both increases and decreases the scope of the lease |
---|
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are CU100,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to (a) include an additional 1,500 square metres of space in the same building starting from the beginning of Year 6 and (b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square metres is CU150,000 payable at the end of each year (from Year 6 to Year 8). Lessee's incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum. | The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the stand-alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee does not account for the increase in scope that adds the right to use an additional 1,500 square metres of space as a separate lease. | The pre-modification right-of-use asset and the pre-modification lease liability in relation to the lease are as follows. | | Year | | Lease liability | | Right-of-use asset | | | | Beginning balance | 6% interest expense | Lease payment | Ending balance | | Beginning balance | Depreciation charge | Ending balance | | | | CU | CU | CU | CU | | CU | CU | CU | | | 1 | | 736,009 | 44,160 | (100,000) | 680,169 | | 736,009 | (73,601) | 662,408 | | | 2 | | 680,169 | 40,810 | (100,000) | 620,979 | | 662,408 | (73,601) | 588,807 | | | 3 | | 620,979 | 37,259 | (100,000) | 558,238 | | 588,807 | (73,601) | 515,206 | | | 4 | | 558,238 | 33,494 | (100,000) | 491,732 | | 515,206 | (73,601) | 441,605 | | | 5 | | 491,732 | 29,504 | (100,000) | 421,236 | | 441,605 | (73,601) | 368,004 | | | 6 | | 421,236 | | | | | 368,004 | | | | At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability on the basis of: (a) a three-year remaining lease term, (b) annual payments of CU150,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum. [Refer:paragraph 45] The modified liability equals CU393,647, of which (a) CU131,216 relates to the increase of CU50,000 in the annual lease payments from Year 6 to Year 8 and (b) CU262,431 relates to the remaining three annual lease payments of CU100,000 from Year 6 to Year 8. | Decrease in the lease term
At the effective date of the modification (at the beginning of Year 6), the pre-modification right-of-use asset is CU368,004. Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset based on the remaining right-of-use asset for the original 2,000 square metres of office space (ie a remaining three-year lease term rather than the original five-year lease term). The remaining right-of-use asset for the original 2,000 square metres of office space is CU220,802 (ie CU368,004 ÷ 5 × 3 years).
| At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is CU421,236. The remaining lease liability for the original 2,000 square metres of office space is CU267,301 (ie present value of three annual lease payments of CU100,000, discounted at the original discount rate of 6 per cent per annum). | Consequently, Lessee reduces the carrying amount of the right-of-use asset by CU147,202 (CU368,004 – CU220,802), and the carrying amount of the lease liability by CU153,935 (CU421,236 – CU267,301). Lessee recognises the difference between the decrease in the lease liability and the decrease in the right-of-use asset (CU153,935 – CU147,202 = CU6,733) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6). [Refer:paragraph 46(a)] | Lease liability | CU153,935 | | | | Right-of-use asset | CU147,202 | | | | Gain | CU6,733 | At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the remeasurement of the remaining lease liability reflecting the revised discount rate of 7 per cent per annum, [Refer:paragraph 45(c)] which is CU4,870 (CU267,301 – CU262,431), as an adjustment to the right-of-use asset. | Lease liability | CU4,870 | | | | Right-of-use asset | CU4,870 | Increase in the leased space
At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning of Year 6), Lessee recognises the increase in the lease liability related to the increase in scope of CU131,216 (ie present value of three annual lease payments of CU50,000, discounted at the revised interest rate of 7 per cent per annum [Refer:paragraph 45(c)]) as an adjustment to the right-of-use asset. [Refer:paragraph 46(b)]
| Right-of-use asset | CU131,216 | | | | Lease liability | CU131,216 | The modified right-of-use asset and the modified lease liability in relation to the modified lease are as follows. | | Year | | Lease liability | | Right-of-use asset | | | | Beginning balance | 7% interest expense | Lease payment | Ending balance | | Beginning balance | Depreciation charge | Ending balance | | | | CU | CU | CU | CU | | CU | CU | CU | | | 6 | | 393,647 | 27,556 | (150,000) | 271,203 | | 347,148 | (115,716) | 231,432 | | | 7 | | 271,203 | 18,984 | (150,000) | 140,187 | | 231,432 | (115,716) | 115,716 | | | 8 | | 140,187 | 9,813 | (150,000) | - | | 115,716 | (115,716) | - | | |
Example 19—Modification that is a change in consideration only |
---|
Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for the remaining five years to reduce the lease payments from CU100,000 per year to CU95,000 per year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. Lessee's incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum. The annual lease payments are payable at the end of each year. | At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability based on: (a) a five-year remaining lease term, (b) annual payments of CU95,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum [Refer:paragraph 45(c)]. Lessee recognises the difference between the carrying amount of the modified liability (CU389,519) and the lease liability immediately before the modification (CU421,236) of CU31,717 as an adjustment to the right-of-use asset. [Refer:paragraph 46(b)] |
|