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Modification and remeasurement of a lease

Income statement impact

Lessee Corp would recalculate the single lease expense using the following formula.

Future undiscounted cash flows at the remeasurement date + (the right-of-use asset
- the lease liability immediately after the remeasurement )
Remaining lease term

The amounts are as follows:

$550,000 + ($495,162 - $491,162) = $110,800 single lease expense
5

Lessee Corp would recognize annual single lease expense of $110,800 for the remaining term of the
lease.

EXAMPLE 5-6

Accounting for a modified operating lease with a decrease in lease term - no change to lease
classification

On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease property to be used
as a retail store.

The lease has the following terms:

Lease commencement date January 1, 20X1

Initial lease term 5 years with no renewal option

Annual lease payments $100,000

Payment date Annually on January 1
Initial direct costs $10,000

Lessee Corp determines that the lease is an operating lease. Lessee Corp’s incremental borrowing rate
at the lease inception date is 5%.

On January 1, 20X2, Lessee Corp and Lessor Corp amend the original lease contract to decrease the
term of the lease to three years and increase the annual lease payments to $110,000. Since there is a
not an additional right of use granted, Lessee Corp should reassess and remeasure the lease as of the
effective date of the modification.

Lessee Corp reassesses the lease classification and determines that the lease should continue to be
classified as an operating lease upon modification.

The following table summarizes information pertinent to the lease modification.

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