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Modification and remeasurement of a lease

5.7 Accounting for a lease termination – lessor

A lessor’s accounting for the underlying asset at the end of the lease term is described in ASC 842-30-
35-5.

ASC 842-30-35-5
At the end of the lease term, a lessor shall reclassify the net investment in the lease to the appropriate
category of asset (for example, property, plant, and equipment) in accordance with other Topics,
measured at the carrying amount of the net investment in the lease. The lessor shall account for the
underlying asset that was the subject of a lease in accordance with other Topics.

If a lease is fully terminated prior to the end of the lease term, a lessor should follow the guidance in
ASC 842-30-40-2.

ASC 842-30-40-2
If a sales-type lease or a direct financing lease is terminated before the end of the lease term, a lessor
shall do all of the following:

a. Test the net investment in the lease for impairment in accordance with Topic 310 on receivables
and recognize any impairment loss identified

b. Reclassify the net investment in the lease to the appropriate category of asset in accordance with
other Topics, measured at the sum of the carrying amounts of the lease receivable (less any
amounts still expected to be received by the lessor) and the residual asset

c. Account for the underlying asset that was the subject of the lease in accordance with other Topics.

If a lessee continues to use the asset for a period time after the lease termination is agreed upon, the
termination should be accounted for as a lease modification based on the modified lease term (through
the planned exit date). For example, if the lessee and lessor agree to terminate a lease in six months
with a termination penalty, the lease should be accounted for as a modified lease with a six-month
term.

Terminating the lease of one asset before the end of the lease term and leasing a similar asset from the
same lessor may not always be considered a termination of the original lease. In some cases, it may be
treated as a modification. For example, if a lessee negotiates to terminate a lease of one floor of a
building and concurrently negotiates a new lease of a different floor in the same building, this would
be accounted for as a modification if the new lease was not priced at market.

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