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Modification and remeasurement of a lease

Income statement impact
The single lease expense should be calculated as illustrated in Example 5-5.

EXAMPLE 5-7

Accounting for a change in consideration in an operating lease - no change in 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 (includes a termination option
available after year 3 with a termination
penalty)

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%. At lease commencement, Lessee Corp concludes that it is reasonably
certain to not exercise the termination option. Therefore, a lease term of five years was used for initial
measurement.

On January 1, 20X4, Lessee Corp considers terminating the lease and relocating to another location.
To entice Lessee Corp to remain in its location, Lessor Corp agrees to amend the original lease contract
to reduce the annual lease payments in the last two years to $90,000. The termination penalty in the
contract remains the same. Lessee Corp ultimately concludes that it will remain in the lease through
the initial lease term.

Lessee Corp 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.

Modification date January 1, 20X4
Modified annual lease payments $90,000

Lessee Corp’s incremental borrowing rate on
December 31, 20X3 4%

Lease liability immediately before the modification $195,238

5-24