Change Formula Lease For Free

A lessee should account for any direct costs, lease incentives, or other payments made by the lessee or lessor in connection with a lease modification in the same manner as those items would be accounted for in connection with a new lease. See LG 4.2. 2.2 for information on direct costs.

When a lessee concludes that a lease modification should be accounted for as a new contract that is separate and apart from the original lease, the new contract should be evaluated for whether it is a lease or contains an embedded lease (see LG 2.3 for the definition of a lease).

Examples of Triggering Events for Lease ReassessmentsConstruction of significant leasehold improvements. Subleasing an asset for a period beyond end of the current lease term. Significantly modifying or customizing the asset. Making a business decision directly relevant to option exercise.

As can be seen from the diagram, a modification will only be treated as a separate lease if it involves the addition of one or more underlying assets at a price that is commensurate with the standalone price of the increase in scope.

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.

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.

Under ASC 840, when a lease is amended to expand the leased premises, the amendment is considered a new lease, and any deferred rent under the prior lease should be included in the calculation of straight-line rent expense for the new lease term.