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Modification and remeasurement of a lease

5.6 Accounting for a lease modification – lessor

A lessor’s accounting for a lease modification depends on the type of modification made to the lease.
Depending on the changes made to the lease contract, a lease modification can result in either a
separate new lease (i.e., accounted for separate from the original lease) or a new modified lease. The
following figure illustrates the steps to determine the accounting for a change made to a lease.

Figure 5-3
Lessor’s accounting for a lease modification

A lessor should account for the exercise by a lessee of an option to extend or terminate the lease or to
purchase the underlying asset as a lease modification unless the exercise of that option by the lessee is
consistent with the assumptions that the lessor made in accounting for the lease at the commencement
date of the lease (or the most recent effective date of a modification that is not accounted for as a
separate contract).

A reporting entity should account for all initial direct costs, lease incentives, and any other payments
made to or by the entity in connection with a modification to a lease in the same manner as those
items would be accounted for in connection with a new lease.

5.6.1 Separate new lease

A lessor should apply the same accounting as a lessee for a modification that results in a separate new
lease. See LG 5.2.1.1 for more information on a lessee’s accounting for a separate new lease.

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