Landlord Lease modifications / Rental modifications
Accounting for lease modifications has become a hot topic due to the COVID-19 pandemic, with many tenants seeking rent concessions and other changes to lease agreements.
Unlike IAS 17, IFRS 16 provides detailed guidance on the lessor accounting for lease modifications, with separate guidance for modifications to finance leases and operating leases.
A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. Common examples are:
- decreasing the scope of the lease by removing the right to use one or more underlying assets;
- decreasing the scope of the lease by shortening the contractual lease term; and
- changing the consideration in the lease by increasing or decreasing the lease payments.
Changes that result from renegotiations of the original contract are lease modifications.
- the lessee exercises an option not previously included in the lessor’s determination of the lease term;
- the lessee does not exercise an option previously included in the lessor’s determination of the lease term;
- an event occurs that contractually obliges the lessee to exercise an option not previously included by the lessor; or
- an event occurs that contractually prohibits the lessee from exercising an option previously included by the lessor (see Changes in the lease term).
The following diagram summarises the accounting for lease modifications by a lessor/landlord.
Original lease is a finance lease
Change to contractual terms and conditions
Original lease is an operating lease
Increase in scope of lease by adding right of use for one or more underlying assets and at stand-alone price for increase
All other contract modifications.
Classification at inception if modification had been in effect then as:
Similar to a lessee, a lessor accounts for modifications to operating and finance leases on the effective date of the modification. This is the date when both parties agree to the lease modification. (IFRS 16.79–80, IFRS 16.87)