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Modification and remeasurement of a lease
The lease has the following terms:
Lease commencement date January 1, 20X1
Initial lease term 10 years with no renewal option
Economic life 12 years
Annual lease payments $100,000
Payment date Annually on January 1
Initial direct costs $10,000
Lessee Corp determines that the lease is a finance lease. Lessee Corp’s incremental borrowing rate at
the lease inception date is 5%.
On January 1, 20x4, Lessee Corp and Lessor Corp amend the original lease contract to decrease the
remaining term of the lease to four years and increase the annual lease payments to $110,000. Since
there is not an additional right of use granted, Lessee Corp reassesses the lease classification and
determines that it is now an operating lease.
The following table summarizes information pertinent to the lease remeasurement required upon the
change from a finance to an operating lease.
Remeasured lease term 4 years
Lessee Corp’s incremental borrowing rate on the
remeasurement date 6%
Right-of-use asset immediately before the remeasurement $574,548
Lease liability immediately before the remeasurement $607,569
How would Lessee Corp account for the remeasurement?
Analysis
Balance sheet impact
To remeasure the lease liability, Lessee Corp would first calculate the present value of the future lease
payments for the new lease term (using the updated discount rate of 6%). As shown in the table, the
revised lease liability would be $404,031.
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