Scenario 2: Lease Modification to Decrease Scope of Lease Term

In this example, a 36-month lease contract is created for one asset under IFRS 16. The monthly rent payments are CU 1,000 payable at the beginning of every day (i.e., advance payments) on the 15th of the month. The Lessee’s nominal discount rate at the commencement date is 3.96% 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: 3.96
    • Compounding Frequency: Monthly
    • 360 Convention: Selected
    • Payments in Arrears: Unselected
  2. Set up the lease component and enter the following inputs on the Terms & Conditions page to create the Base Rent term:

    • Lease Amount: 1,000
    • Amount Frequency: One Time
    • Payment Frequency: Monthly
    • First Payment Date: 2019-07-15
    • Last Payment Date: 2022-06-30
    • Term (months): 36
    • Expected T&C Start Date: 2019-07-01
    • Expected T&C End Date: 2022-06-30
  3. Complete the contract inception process and activate the activation group with the Activation Date set to "2019-07-01".
  4. Once the activation group is activated, the following entries must be posted:

    Dr. Right-of-Use Asset

    33,950.79

     

    Cr. Lease Liability

     

     

    33,950.79

At the beginning of the second month in the lease term (i.e. August, 2019), the Lessee and Lessor agree to decrease the duration of the lease to 24 months in total and update the discount rate at the Effective Date of the modification. Under IFRS 16 this is considered as a decrease in scope, and therefore requires the accounting treatment and steps detailed in the example below.

Note: For ASC 842, a decrease in term is treated as a regular modification, and therefore results in different adjustment postings than what is illustrated in this example.

In order to enter a decrease in scope that is in compliance with the standards, two lease modification events must be performed on the contract. To decrease the lease term, 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 Lease Term
    • Modify Contract Rate: Unselected

    • ROU Asset Decrease Amount (IFRS): 11,316.93

      Note: The amount in this field is determined by manually calculating the amount of the ROU asset to be returned at the Effective Date (i.e. 12 months out of the remaining 35 months).

  2. The remaining lease term at the Effective Date must be shortened from 36 to 24 months. On the lease component Terms & Conditions page, modify the following fields in the Base Rent term:
    • Last Payment Date: 2021-06-30
    • Term (months): 24
    • Expected T&C End Date: 2021-06-30
  3. Complete the lease modification with the Effective Date set to "2019-08-15".
  4. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    10,925.24

     

    Dr. Gain/Loss 391.69 

    Cr. Right-of-Use Asset

     

    11,316.93

To change the contract rate, perform the second lease modification event with 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: 4.00
  2. Complete the lease modification with the Effective Date set to "2019-08-15". 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.
  3. Once the event draft is merged, the following entries must be posted:

    Dr. Lease Liability

    8.00

     

    Cr. Right-of-Use Asset

     

    8.00

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

Dr. Lease Liability

10,933.24

 

Dr. Gain/Loss   391.69  

Cr. Right-of-Use Asset

 

11,324.93

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