Understanding ASC 842 and IFRS 16
      Back to home
      1. Help Center
      2. Lease Accounting
      3. Understanding ASC 842 and IFRS 16

      What is the Difference Between a Lease Modification and a Lease Termination?

      For lease modifications that do not meet the criteria to be accounted for as a separate contract, the remaining consideration in the contract must be remeasured and reallocated upon the effective date of the modification. A modification that is not accounted for as a separate contract may

      1. Extends or Reduces the Lease Term, other than through exercise of an option
      2. Grants the lessee an additional right of use
      3. Only changes the contract consideration
      4. Fully or partially terminate the lease

      Refer to the chart below for how to treat each lease modification type:

       Modification Type

      Lessee Accounting

      Extends or reduces the Lease Term, other than through exercise of an option
      • Lessee should reassess lease classification as of the effective date of the modification using the modified terms and conditions 
      • Consideration is remeasured and reallocated using the revised lease payments and updated discount rate
      • The lessee would use the updated lease payments and discount rate to revise the lease liability and adjust the ROU asset on the basis of the difference.
      • No impact to the income statement

      Grants lessee an additional right of use not included in original contract that is not accounted for as a separate contract

      Only changes the contract consideration

      Modification decreases scope of the lease through a full or partial termination 
      • Lessee should reassess lease classification as of the effective date of the modification using the modified terms and conditions 
      • Consideration is remeasured and reallocated using the revised lease payments and updated discount rate
      • The lessee would use the updated lease payments and discount rate to revise the lease liability and adjust the ROU asset in a proportionate manner.
      • Difference between the proportionate reduction of the ROU asset and lease liability is recognized in the income statement as a gain or a loss.

      A lease termination results in a gain or loss charged to the income statement immediately. However, a modification does not result in an immediate charge to the income statement, unless the modification is a considered a partial termination. 

      Accounting Guidance Referenced:

      • ASC 842-10-25-10
      • ASC 842-10-25-11
      • Deloitte A Roadmap to Applying the New Leasing Standard (2020) 8.6 
      • PwC Leases October 2020 5.5