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Commonly Asked Questions about Lease Agreement Modifications
Under what circumstances must a company account for a contract modification as a new contract?
Therefore, a modification of an existing contract should be accounted for as a new contract that is separate and apart from the existing contract when (1) there are additional distinct goods or services promised to a customer and (2) those goods or services are in exchange for consideration that represents the stand-
What are the conditions for modification of a contract?
First of all, the parties are free to modify the contract between them. Secondly, the modification shall be made by the agreement of the parties. And thirdly, the agreement for modifying the contract shall be docHubed by consensus of the parties on a voluntary basis through consultation.
Which two conditions must be met for a contract modification to be accounted for as a new lease?
A lessee and lessor may agree to modify a lease to both (1) include an additional right of use at its stand-alone price and (2) change the scope of or consideration for the existing right of use. In such cases, the parties to the lease cannot account for the additional right of use as a separate contract.
What qualifies as a lease modification?
IFRS 16 Leases contains detailed guidance on how to account for lease modifications. A lease modification is defined as a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.
What is the difference between a lease modification and a lease reassessment?
A lease modification can be easily identified; it requires a substantive change that was not included in the original terms and conditions of the lease, while a lease reassessment can occur when assumptions and other events outside the lease have changed, which can be difficult at times to identify.
How would you account modifications to a lease?
Account for the lease modification as a termination of the original lease and creation of a new lease from the effective date of the modification. Measure the carrying amount of the underlying asset as the net investment in the original lease immediately before the effective date of the modification.
