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Modification and remeasurement of a lease

5.6.2 Modified lease

If a lease modification is not accounted for as a separate new lease, it should be accounted for as a
modified lease; that is, it should be accounted for as a single new lease from the effective date of the
modification. Since the modified lease is recorded as a single new lease, the lease classification should
be reassessed based on the modified terms. See LG 3 for information on lease classification. The
accounting treatment depends on the lease type before and after the modification.

5.6.2.1 Direct financing lease prior to the modification

The accounting for the modification of a direct financing lease will depend on how the lease is
classified after it is modified. The following table summarizes the accounting for the modification of a
direct financing lease.

Figure 5-4
Accounting for the modification of a direct financing lease

Modified lease
classification Lessor accounting Example

Direct financing lease The net investment in the modified lease does not Example 5-10
change at the modification date. The lessor should
adjust the discount rate for the modified lease so that
the initial net investment in the modified lease
equals the carrying amount of the net investment in
the original lease, net of any deferred selling profit,
immediately before the effective date of the
modification plus any capitalized initial direct costs
incurred in conjunction with the modification

Sales-type lease The lessor should account for the modified lease in Example 5-11
accordance with ASC 842-30. The commencement
date of the modified lease is the effective date of the
modification. In order to calculate the selling profit
or loss on the lease, the fair value of the underlying
asset is its fair value at the effective date of the
modification and its carrying amount is the carrying
amount of the net investment in the original lease
immediately before the effective date of the
modification. Initial direct costs incurred in
conjunction with a modification should be expensed
unless the fair value of the underlying asset at the
modification date equals its carrying amount (i.e.,
there is no selling profit). In that case, the initial
direct costs would be deferred and recognized over
the lease term using a method that produces a
constant periodic rate of return on the lease when
combined with the interest income on the lease
receivable and the residual asset.

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