Page 164 - pwc-lease-accounting-guide_Neat

Modification and remeasurement of a lease

5.1 Chapter overview

This chapter addresses the accounting for modifications, including termination, of a lease contract. It
also addresses the accounting for lease remeasurements for reassessment events that are not
modifications.

Depending on the facts and circumstances, a lease modification may be accounted for by either the
lessee and lessor as (1) two leases – the original lease and a separate new lease, or (2) one modified
lease. When a lease modification is accounted for as one modified lease, the lessee and lessor must
reconsider the lease classification and remeasure the lease.

ASC 842 also describes other circumstances in which a lessee must reconsider certain assumptions
made at the lease commencement date (e.g., whether exercise of a renewal or purchase option is
reasonably certain) and remeasure the lease liability and adjust the related right-of-use asset. In some
of those cases, ASC 842 requires a lessee to reassess the classification of a lease.

A lessee is required to remeasure its lease liability and adjust the related right-of-use asset upon the
occurrence of the following:

□ Lease modifications not accounted for as a separate contract

□ A triggering event that changes the certainty of a lessee exercising an option to renew or terminate
the lease, or purchase the underlying asset

□ A change to the amount probable of being owed by the lessee under a residual value guarantee

□ The resolution of a contingency upon which variable lease payments are based such that those
payments become fixed

A lessor is not required to remeasure a lease unless the lease contract is modified.

5.2 Accounting for a lease modification – lessee

A lessee and lessor may renegotiate the terms of a lease for a variety of reasons. The ASC 842 Glossary
defines a lease modification.

Definition from ASC 842 Glossary

Lease Modification: A change to the terms and conditions of a contract that results in a change in the
scope of or the consideration for a lease (for example, a change to the terms and conditions of the
contract that adds or terminates the right to use one or more underlying assets or extends or shortens
the contractual lease term).

The following are examples of lease modifications that may be negotiated after the lease
commencement date:

□ A lease extension

□ Early termination of the lease

5-2