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Modification and remeasurement of a lease

Reassess lease classification based on the terms of the modified lease

Lessor Corp would classify the modified lease as an operating lease because it does not meet any of the
criteria to be classified as a sales-type lease or direct financing lease.

Account for the modified lease

Lessor Corp would account for the modified lease by derecognizing the net investment in the lease of
$1,055,201 and recognizing the equipment at the same amount. If collectibility of the lease payments
is probable, Lessor Corp would recognize the remaining lease payments on a straight-line basis over
the two-year modified lease team and record depreciation on the equipment.

5.6.2.2 Operating lease prior to the modification

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

Figure 5-5
Accounting for the modification of an operating lease

Modified lease
classification Lessor accounting Example

Direct financing lease The net investment in the lease on the modification
date equals the lessor’s carrying value of the asset

adjusted for any accrued rent asset or liability on
that date. Any selling profit and initial direct costs
incurred in conjunction with the modification are
deferred and included in the measurement of the
initial net investment in the modified lease. Any
unamortized initial direct costs associated with the
original lease may continue to be included in the
measurement of the initial net investment in the
modified lease.

Sales-type lease The net investment in the lease on the modification Example 5-14
date will equal fair value of the asset. Selling
profit/loss would be adjusted for any prepaid or
accrued rent on that date and any initial direct costs
incurred in conjunction with the modification.
Operating lease No gain or loss is recognized as a result of the Example 5-13
modification. A new straight-line lease income is
calculated based on the remaining payments
adjusted for any prepaid or accrued rent at the date
the modification is recorded. Any initial direct costs
incurred in conjunction with the modification are
initially capitalized and then recognized as an
expense on the same basis as lease income.

5-40