Scenario 3: Lease Modification to Decrease Scope of Asset Value

In this example, a 10-year lease contract is created for one asset. The yearly rent payments are CU 50,000 payable at the end of every December 31st (i.e. arrears payments on December 31st). The Lessee’s effective discount rate at the commencement date is 6% per annum.

To set up the contract, the following inputs must be entered during contract inception. For detailed information on the contract inception process, refer to About Contract Inception.

  1. Create the contract and enter the following inputs on the contract Accounting page:
    • Contract Rate: 6.00
    • Compounding Frequency: Annually
    • 360 Convention: Selected
    • Payments in Arrears: Selected
  2. Set up the lease component and enter the following inputs on the Terms & Conditions page to create the Base Rent term:

    • Lease Amount: 50,000
    • Amount Frequency: One Time
    • Payment Frequency: Yearly
    • First Payment Date: 2018-12-31
    • Last Payment Date: 2027-12-31
    • Term (months): 120
    • Expected T&C Start Date: 2018-01-01
    • Expected T&C End Date: 2027-12-31
  3. Complete the contract inception process and activate the activation group with the Activation Date set to "2018-01-01".
  4. Once the activation group is activated, the following entries must be posted:

    Dr. Right-of-Use Asset

    368,004.35

     

    Cr. Lease Liability  368,004.35

At the beginning of the sixth year in the lease term (i.e. January, 2023), the Lessee and Lessor agree to decrease the value of the leased asset to 50% of its carrying value (e.g. reduction in office space), adjust the remaining rent payments from CU 50,000 to CU 30,000, and update the discount rate at the Effective Date of the modification. This constitutes a decrease in scope, according to both IFRS 16 and ASC 842 standards, which requires the special treatment explained below.

In order to enter a decrease in scope of asset value in the application that is in compliance with IFRS 16 and ASC 842, two lease modification events must be performed on the contract. To decrease the asset value, enter the following inputs during the first lease modification event:

  1. Set the following fields in the lease modification pop-up:
    • Amendment Date: Set this date to the date of the amendment (i.e. today's date).
    • Reason Code: Decrease Asset Value
    • Modify Contract Rate: Unselected

    • ROU Asset Decrease Amount (IFRS): 92,001.09
    • ROU Asset Decrease Amount (GAAP): 105,309.09

    Note: Amounts in the ROU asset decrease fields are determined by manually calculating the amount of the ROU asset to be returned at the selected Effective Date (i.e., decrease of 50% of the carrying value).

  2. The carrying value of the ROU liability must be proportionately decreased by 50%. On the lease component Terms & Conditions page, add a Reduction term with the following inputs:
    • Lease Amount: 25,000
    • Amount Frequency: One Time
    • Payment Frequency: Yearly
    • First Payment Date: 2023-12-31
    • Last Payment Date: 2027-12-31
    • Term (months): 60
    • Expected T&C Start Date: 2023-01-01
    • Expected T&C End Date: 2027-12-31
  3. Complete the lease modification with the Effective Date set to "2023-01-01".
  4. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    105,309.09

     

    Cr. Gain/Loss  13,308.00

    Cr. Right-of-Use Asset

     

    92,001.09

To adjust the rent and change the contract rate, perform the second lease modification event and enter the following parameters:

  1. Set the following fields in the lease modification pop-up:
    • Amendment Date: Set this date to the date of the amendment (i.e. today's date).
    • Reason Code: Set this field to any Reason Code other than Decrease Lease Term or Decrease Asset Value.
    • Modify Contract Rate: Selected
    • Contract Rate: 5.00
  2. To adjust the remaining rent payments, add a Supplemental term with the following inputs:
    • Lease Amount: 5,000
    • Amount Frequency: One Time
    • Payment Frequency: Yearly
    • First Payment Date: 2023-12-31
    • Last Payment Date: 2027-12-31
    • Term (months): 60
    • Expected T&C Start Date: 2023-01-01
    • Expected T&C End Date: 2027-12-31
  3. Complete the lease modification with the Effective Date set to "2023-01-01". Note that both of the lease modification events described in this scenario must have the same Effective Date because they both occur at the same time.
  4. Once the event draft is merged, the following entries must be posted:

    Dr. Right-of-Use Asset

    24,575.21

     

    Cr. Lease Liability

      24,575.21

After both events are performed, the overall impact as of the Effective Date of the lease modifications is summarized below:

Dr. Lease Liability

80,733.89

 

Cr. Gain/Loss     13,308.00

Cr. Right-of-Use Asset

 

67,425.88

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