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Modification and remeasurement of a lease

recognized a net investment in the lease of $1,200,000 and derecognized the carrying value of the
equipment of $1,200,000.

At the end of year 1 of the lease, Lessor Corp agrees to modify the lease to extend the lease by one year.
The key components at the modification date are shown in the following table.

Modification date December 31, 20X1

Remaining modified lease term 5 years, no renewal option

Remaining economic life 9 years

Purchase option None

Annual lease payment $168,00o

Payment date Annually on January 1

Fair value of the leased equipment $1,000,000

Lessor Corp’s carrying amount of net investment in the $1,055,201 (interest income of $50,201
lease on the modification date was recorded in the first year of the
lease)

Estimated residual value $360,000

Residual value guarantee $275,000 residual value guarantee is
provided by a third party unrelated to
Lessee Corp or Lessor Corp

Rate implicit in the modified lease 6.75%

The modified lease consideration is at a discount to the current market rate for the additional term for
this particular lease contract.

How would Lessor Corp account for the lease modification?

Analysis

Determine if the lease modification is a separate new lease

Since the change in pricing of the lease is not commensurate with the standalone price and there is no
additional right-of-use asset, Lessor Corp would not account for the modification as a new lease,
separate from the original five-year lease. Lessor Corp should account for one new modified lease as of
December 31, 20X1.

Reassess lease classification based on the terms of the modified lease

Lessor Corp would base its lease reassessment on the equipment fair value as of the modification date
and discount rate implicit in the modified lease (6.75%). The lease is not a sales-type lease because
none of the criteria in ASC 842-10-25-2 are met. Lessor Corp would conclude that the lease is a direct

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