Decrease in Term

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 Term”. This 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 decrease in lease term, changes must be done in two parts:

You must add a new base rent term in the lease component that has an earlier end date.
You must exercise this new term in an activation group event and change the ROU End Date, which generates the following postings:
- For IFRS16, the application generates three adjustment postings (for liability, asset, and gain/loss).
- For ASC842, the application generates two adjustment postings (for liability and asset).

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 term:

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 that is identical to the existing one, but with a shorter term to align with the decrease in lease term that will be entered in the next event.
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 Term".
  - Calculate the value that the asset must be decreased by and enter the value in ROU Asset Decrease Amount (IFRS). No value is required for ASC842.
  - 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 (with the shorter term).
3. On the Definition tab, update the ROU End Date to reflect the decrease in asset value entered at the beginning of the event. If an Expected GRV term exists, the GRV Payment Date is automatically updated based on the new ROU End Date.
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.

See also: