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Modification and remeasurement of a lease

At lease commencement, Lessor Corp concludes that the lease is not a sales-type lease because none of
the criteria in ASC 842-10-25-2 are met. Lessor Corp concludes that the lease is a direct financing
lease because the sum of the present value of the lease payments and the present value of the residual
asset guaranteed by the third-party guarantor is substantially all of the fair value of the leased
equipment and collectibility of the lease payments is probable. Therefore, Lessor Corp initially
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 shorten the lease term by
two years. The key components at the modification date are shown in the following table.

Modification date January 1, 20X2

Remaining modified lease term 2 years, no renewal option

Remaining economic life 9 years

Purchase option None

Annual lease payment $190,00o

Payment date Annually on January 1

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

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

Estimated residual value $700,000

Residual value guarantee No residual value guarantee is provided

Rate implicit in the modified lease 5.43%

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 would account for one new modified lease as of
January 1, 20X2.

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