A lease modification under IFRS 16 is any change in the scope of a lease or the consideration that was not part of the original terms.
Key accounting treatment:
Scenario 1: Assess if it is a separate lease
A modification is treated as a separate lease if:
-
- It adds the right to use one or more underlying assets, and
- The consideration increases by an amount commensurate with the standalone price (adjusted for contract-specific factors, if applicable)
Scenario 2: If not a separate lease
The existing lease is remeasured:
Lessee accounting:
-
- Recalculate the lease liability using a revised discount rate (IBR at modification date)
- Adjust the right-of-use (ROU) asset accordingly
Treatment depends on modification type:
-
- Increase in scope → Adjust ROU asset based on remeasured liability
- Decrease in scope (partial termination) →
- Reduce ROU asset proportionately
- Recognize gain/loss in P&L
- Change in lease payments only (no scope change) → Remeasure liability and adjust ROU asset
Key impact:
-
- Affects lease liability, ROU asset, and profit/loss
- Requires significant judgment (discount rate, scope assessment)
- High-risk audit area due to complexity