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Modification and remeasurement of a lease
Modification date January 1, 20X2
Revised remaining lease term 2 years
Modified annual lease payments $110,000
Lessee Corp’s incremental borrowing rate on 6%
January 1, 20X2
Right-of-use asset immediately before the modification $380,325
Lease liability immediately before the modification $372,325
How would Lessee Corp account for the lease modification?
Analysis
Balance sheet impact
Lessee Corp would remeasure the lease liability on the date of the modification by calculating the
present value of the remaining two future lease payments for the modified lease term using Lessee
Corp’s current discount rate of 6%. The modified lease liability would be $213,774, as shown in the
table below.
Year 2 Year 3 Total
Lease payment $110,000 $110,000 $220,000
Discount 0 6.226 6,226
Present value $110,000 $103,774 $213,774
Although the lease liability has been decreased as a result of the modification, it is not a partial
termination of the lease because there was no change to the underlying asset being leased. Therefore,
to calculate the adjustment to the lease liability, Lessee Corp would compare the recalculated and
original lease liability balances on the modification date.
Original lease liability $372,325
Revised lease liability 213,774
$158,551
Lessee Corp would record the following journal entry to adjust the lease liability.
Dr. Lease liability $158,551
Cr. Right-of-use asset $158,551
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