Page 166 - pwc-lease-accounting-guide_Neat
P. 166
Modification and remeasurement of a lease
A lessee should account for any direct costs, lease incentives, or other payments made by the lessee or
lessor in connection with a lease modification in the same manner as those items would be accounted
for in connection with a new lease. See LG 4.2.2.2 for information on direct costs. See LG 3.3.4.2 for
information on lease incentives.
5.2.1.1 Separate new lease
ASC 842-10-25-8 provides guidance on whether a lessee should account for a lease modification as a
new lease (separate from the existing lease).
ASC 842-10-25-8
An entity shall account for a modification to a contract as a separate contract (that is, separate from
the original contract) when both of the following conditions are present:
a. The modification grants the lessee an additional right of use not included in the original lease (for
example, the right to use an additional asset).
b. The lease payments increase commensurate with the standalone price for the additional right of
use, adjusted for the circumstances of the particular contract. For example, the standalone price
for the lease of one floor of an office building in which the lessee already leases other floors in that
building may be different from the standalone price of a similar floor in a different office building,
because it was not necessary for a lessor to incur costs that it would have incurred for a new lessee.
An additional right-of-use is granted when the lease contract is modified to give the lessee a right to
use an additional underlying asset that was not included in the original lease. For example, when the
floor space under lease is increased or a lessee receives the right to use a new standalone asset. A
modification to increase the lease term is not considered an additional right-of-use.
Accounting for the separate new lease
When a lessee concludes that a lease modification should be accounted for as a new lease that is
separate and apart from the original lease, the accounting for the original lease is not changed as a
result of the modification. Accordingly, the new lease should be accounted for as any other new lease
(classified as finance or operating and measured accordingly). See LG 3 for information on lease
classification and LG 4 for information on lease measurement.
The new lease is recorded on the commencement date of the new lease, which is the date the lessee has
access to the leased asset. For example, if a lessee modifies a lease to use additional space in a
building, the new lease should be recorded once that space is available for use.
Example 5-1 illustrates a lessee’s accounting for a modification as a separate new lease.
EXAMPLE 5-1
Modification that is a separate new lease
Lessee Corp enters into a 5-year lease for 2,000 square feet of warehouse space with Lessor Corp for
$10,000 per month.
5-4
