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A lease modification is a change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease. The following are examples of lease terms which may be amended after the lease commencement date:
- A lease extension
- Early termination of the lease
- A change in the timing of lease payments
- Leasing additional space in the same building
An entity shall account for a modification to a contract as a separate contract (that is, separate from the original contract) when both of the following conditions are present:
- The modification grants the lessee an additional right of use not included in the original lease. For example, the right to use an additional asset (floor, building, equipment).
- The lease payments increase commensurate with the standalone price for the additional right of use, adjusted for the circumstances of the particular contract. For example, the standalone price for the lease of one floor of an office building in which the lessee already leases other floors in that building may be different from the standalone price of a similar floor in a different office building, because it was not necessary for a lessor to incur costs that it would have incurred for a new lessee.
The “additional right of use” needs to be an additional asset or lease component that differs from that included in the original contract. An extension of the lease term for an asset already subject to the lease would not be considered an additional right of use. However, an additional right to use an asset is when the floor space under lease is increased or a lessee receives the right to use a new standalone asset.
Accounting Guidance Referenced:
- ASC 842-10 — Glossary
- ASC 842-10-25-8
- PwC Leases October 2020 5.2, 5.2.1.1
- Deloitte A Roadmap to Applying the New Leasing Standard (2020) 8.6.2