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Modification and remeasurement of a lease

At the end of year one, Lessee Corp and Lessor Corp agree to amend their lease contract to include an
additional 1,000 square feet of warehouse space in the same building for the remaining four years of
the lease. Lessee Corp pays an additional $6,000 per month for the additional space. The additional
$6,000 is in line with the current market rate to lease 1,000 square feet of warehouse space in that
particular building at the date that the modification is agreed to. Lessee Corp will make one monthly
payment of $16,000 per month after the modification.

How should Lessee Corp account for this lease modification?

Analysis

Lessee Corp should account for the lease modification as a separate lease because the modification
granted Lessee Corp an additional right-of-use at a price that is commensurate with the standalone
price for the additional space. Therefore, on the new lease’s commencement date, Lessee Corp would
have two separate leases:

□ The original lease for 2,000 square feet for four remaining years

□ A new lease for the additional 1,000 square feet for four years

The accounting for the original lease is not impacted by the modification. Beginning on the effective
date of the modification, Lessee Corp would have two separate leases, each of which contains a single
lease component – the original, unmodified lease and the new lease.

5.2.1.2 Modified lease

If a lease modification is not accounted for as a separate lease, a lessee should reassess whether the
contract contains a lease, reallocate contract consideration, reassess the lease classification, remeasure
the lease liability, and adjust the right-of-use asset. For information on determining lease classification
see LG 3. For information on remeasuring the lease liability and adjusting the right-of-use asset see LG
5.3.3 and LG 5.3.4.

A modified lease could have multiple components. For example, if a lease is modified such that an
additional right-of-use is granted (e.g., additional space is leased) but the modification is not recorded
as a separate new contract, there will be two separate lease components in the new modified lease. See
Example 17 beginning at ASC 842-10-55-168 for additional information.

5.3 Accounting for lease remeasurement – lessee

A lessee should reallocate the contract consideration between the lease and nonlease components,
remeasure its lease liability, and adjust the related right-of-use asset upon the occurrence of certain
events. How the lease liability is remeasured and the right-of-use asset adjusted will depend on the
reason for the lease remeasurement; in some cases, it will result in an entry to profit or loss. A lessee
may also need to do one or more of the following depending on the reason for lease remeasurement:

□ Reassess whether a contract is (or contains) a lease

□ Reallocate contract consideration

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