Decrease in Asset

To decrease the carrying amount of the right-of-use asset and the carrying amount of the lease liability in the same proportion (yet with different absolute adjustment amounts), you can use the activation group event with the Modification Reason “Decrease in Asset”. This type of event allows you to enter asset decrease amounts that are independent of the lease liability decrease amounts that result from changes in the Terms & Conditions.

IFRS 16 requires proportionate adjustment to NBV based on the remaining lease term, whereas ASC 842 treats it like a regular remeasurement where the ROU adjustment amount is equal to the lease liability adjustment.

Note: This event cannot be entered for short term leases or low value leases because no assets were created.

To properly perform a proportional decrease in asset and lease liability, changes must be done in two parts:

You must add a new base rent term in the lease component that will decrease the carrying amount of the lease liability in the same proportion as the decrease in carrying amount of the right-of-use asset.
You must decrease the asset value via an activation group event and exercise the new base rent term, which then generates three adjustment postings (for liability, asset, and gain/loss) for finance leases under all standards and for ASC842 operating leases.

Note: Any other changes required (e.g., change in the Contract Rate or IBR) must be performed in a separate event because, in the first event, the ROU asset amount is manually adjusted. If, for example, the IBR were changed in the same event, it would impact only the lease liability and not the ROU asset. However, as per accounting standards, a change in IBR requires the ROU asset to be adjusted by the present value of the remaining minimum lease payments resulting from the IBR change. To ensure the correct accounting impact on both the lease liability and the ROU asset, these other changes must therefore be performed as a separate activation group event dated one day after the previous event (as multiple events on the same day are not supported).

To perform a decrease in asset value:

Open the required lease component and create an event. Use the regular event procedure, but you must add the following:
1. On the Terms & Conditions tab, enter a new Base Rent term. The carrying amount of lease liability must be decreased in the same proportion as the decrease in carrying amount of the right-of-use asset entered at the beginning of the event. For example, if the asset must be decreased by 40%, the new base rent term must be 60% of the original base rent.
Open the required activation group and create an event. Use the regular event procedure, but note the following:
1. In the Create Event pop-up, enter the required fields as usual, as well as the following specific settings:
  - Set the Modification Reason to "Decrease in Asset".
  - Based off of the closing NBV value of the period preceding the Modification Date, calculate the decrease in asset value for each accounting standard and enter the values in the ROU Asset Decrease Amount field. Use the tabs to navigate between accounting standards. Note that if there is a Salvage Value, this ROU Asset Decrease Amount cannot be greater than the the closing NBV value of the period preceding the Modification Date minus the Salvage Value.
  - In the field Use a Revised Discount Rate?, select "Unchanged Discount Rate" to leave the contract rate or IBR unchanged.
    Note: Any rate change must be done in a separate event.
2. On the Terms & Conditions tab, make the following changes:
  - The existing base rent term has been split in two (based on the Modification Date). Unexercise the old base rent.
  - Exercise the base rent term that was added in the previous lease component event, which represents the proportional decrease in liability.
  Note: Do not exercise the second term that was added for the base rent increase.
Create another activation group event with the Modification Date set to one day after the previous event for anything that is expected to impact asset by the same amount as liability (i.e., present value of minimum lease payments), such as modifying the contract rate or IBR.
Note: You must now set the second term to increase the base rent as likely to be exercised.

See also: