Lease Modification Examples: How to Account for Mid-Term Changes

Published: January 8, 2025 | Reading Time: 10 minutes

Lease modifications are one of the most complex and frequently encountered challenges in IFRS 16 accounting. Whether it's a rent increase, lease extension, space reduction, or early termination, understanding how to properly account for these changes is essential for accurate financial reporting.

This comprehensive guide provides practical examples with real numbers, journal entries, and step-by-step calculations for the most common types of lease modifications under IFRS 16.

What is a Lease Modification?

Under IFRS 16, a lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions.

Common Examples of Modifications:

  • Scope Changes:
    • Adding or removing the right to use one or more underlying assets
    • Extending or shortening the contractual lease term
  • Consideration Changes:
    • Changing the lease payments (rent increase/decrease not linked to original terms)
    • Restructuring payment schedule

Key Principle:

When a modification occurs, you must remeasure the lease liability using a revised discount rate and adjust the carrying amount of the ROU asset. The accounting treatment depends on whether the modification is a separate lease or not.

Modification vs. Remeasurement

It's critical to distinguish between modifications and remeasurements - they have different accounting treatments:

Aspect Lease Modification Lease Remeasurement
Definition Change NOT in original contract terms Triggered by events specified IN original contract
Examples - Negotiated rent increase
- Agreed extension beyond original term
- Addition/removal of space 		- CPI-linked rent adjustment
- Reassessment of extension option
- Change in residual value guarantee
Discount Rate Revised discount rate at modification date Unchanged (use original rate)
Adjustment Adjust ROU asset (or recognize gain/loss if partial termination) Adjust ROU asset only
Quick Test: Was this change negotiated outside the original contract? If yes → Modification (use new rate). Was it a pre-defined clause being triggered? If yes → Remeasurement (keep old rate).

Example 1: Rent Increase (Fixed)

Scenario

Original Lease Terms (January 1, 2024):

  • Monthly rent: $10,000
  • Lease term: 48 months (4 years)
  • Payment timing: End of month (Ordinary Annuity)
  • Original IBR: 5.0% per annum
  • Initial lease liability: $447,206
  • Initial ROU asset: $447,206

Modification (January 1, 2025 - Start of Month 13):

  • Landlord and tenant agree to increase rent to $12,000/month
  • All other terms remain the same (36 months remaining)
  • Revised IBR at modification date: 5.5% per annum

Step 1: Determine Lease Liability at Modification Date

Before Modification (December 31, 2024):

After 12 months of payments, the lease liability balance is approximately $336,890

(This would be tracked in your amortization schedule)

Step 2: Calculate Revised Lease Liability

New PV Calculation:
New monthly payment: $12,000
Remaining term: 36 months
New monthly rate: 5.5% / 12 = 0.4583%
Payment timing: End of month

PV = $12,000 × [(1 - (1.004583)^-36) / 0.004583]
PV = $12,000 × 33.5424
Revised Lease Liability = $402,509

Step 3: Calculate Adjustment

Revised Lease Liability (new PV) $402,509
Less: Carrying Amount (old liability) ($336,890)
Adjustment Required $65,619

Treatment: This is NOT a separate lease (no additional rights obtained), so adjust the ROU asset by the same amount.

Step 4: Journal Entry (January 1, 2025)

Dr. Right-of-Use Asset         $65,619
    Cr. Lease Liability               $65,619
(To record lease modification - rent increase)

Result:

  • New Lease Liability: $402,509
  • New ROU Asset: Previous balance + $65,619
  • Going forward: Monthly payments of $12,000 with interest at 5.5%

Example 2: Lease Extension

Scenario

Original Lease Terms (July 1, 2023):

  • Monthly rent: $8,000
  • Original term: 36 months (ending June 30, 2026)
  • Payment timing: Start of month (Annuity Due)
  • Original IBR: 4.5%
  • Initial lease liability: $273,122

Modification (January 1, 2025 - 18 months into lease):

  • Lessee and lessor agree to extend the lease by 24 months
  • New end date: June 30, 2028 (total remaining term: 42 months)
  • Monthly rent remains $8,000
  • Revised IBR: 5.0%

Step 1: Lease Liability Before Modification

After 18 months of payments (with 18 months remaining on original term):

Carrying Amount: $137,250

(Approximate - from amortization schedule)

Step 2: Calculate Revised Lease Liability

New PV Calculation:
Monthly payment: $8,000 (unchanged)
NEW remaining term: 42 months (18 original + 24 extension)
New monthly rate: 5.0% / 12 = 0.4167%
Payment timing: Start of month (Annuity Due)

PV = $8,000 × [(1 - (1.004167)^-42) / 0.004167] × (1.004167)
PV = $8,000 × 38.1548 × 1.004167
Revised Lease Liability = $306,642

Step 3: Calculate Adjustment

Revised Lease Liability $306,642
Less: Carrying Amount ($137,250)
ROU Asset Adjustment $169,392

Step 4: Journal Entry (January 1, 2025)

Dr. Right-of-Use Asset         $169,392
    Cr. Lease Liability               $169,392
(To record lease modification - term extension)

Important Notes:

  • Depreciation going forward: Adjust to spread remaining ROU asset over new 42-month term
  • Interest calculation: Use new 5.0% rate on the revised liability balance
  • This is NOT a separate lease because no new rights are granted, just extension of existing rights

Example 3: Space Reduction (Partial Termination)

Scenario

Original Lease (January 1, 2024):

  • Lease: 10,000 sq ft office space
  • Monthly rent: $50,000
  • Lease term: 60 months (5 years)
  • Original IBR: 5.5%
  • Initial lease liability: $2,588,127
  • Initial ROU asset: $2,588,127

Modification (July 1, 2025 - Month 19):

  • Company downsizes and returns 3,000 sq ft (30% of space)
  • New rent: $35,000/month (for remaining 7,000 sq ft)
  • Remaining term: 41 months
  • Revised IBR: 6.0%

Step 1: Carrying Amounts Before Modification

As of June 30, 2025 (after 18 months):

  • Lease Liability: $1,952,400 (approximate)
  • ROU Asset Carrying Amount: $2,588,127 - (18 × $43,135 depreciation) = $1,811,697

Step 2: Determine Proportionate Reduction

This is a partial termination because the scope of the lease decreased (30% space returned).

Proportionate Reduction (30%):

Lease Liability reduction: $1,952,400 × 30% = $585,720
ROU Asset reduction: $1,811,697 × 30% = $543,509

Gain on Partial Termination = $585,720 - $543,509 = $42,211

Step 3: Calculate New Lease Liability for Remaining Space

After proportionate reduction:
Remaining liability: $1,952,400 - $585,720 = $1,366,680

Remeasure for new terms:
New monthly payment: $35,000
Remaining term: 41 months
New monthly rate: 6.0% / 12 = 0.5%

PV = $35,000 × [(1 - (1.005)^-41) / 0.005]
PV = $35,000 × 36.9329
Revised Lease Liability = $1,292,652

Further adjustment:
Revised liability: $1,292,652
Less: After partial termination: ($1,366,680)
Additional ROU reduction: $74,028

Step 4: Journal Entries (July 1, 2025)

Entry 1: Partial Termination

Dr. Lease Liability                  $585,720
    Cr. Right-of-Use Asset             $543,509
    Cr. Gain on Lease Termination      $42,211
(To derecognize 30% of lease relating to returned space)

Entry 2: Remeasurement Adjustment

Dr. Lease Liability                  $74,028
    Cr. Right-of-Use Asset             $74,028
(To remeasure remaining lease at revised terms)

Net Result:

  • New Lease Liability: $1,292,652
  • New ROU Asset: $1,811,697 - $543,509 - $74,028 = $1,194,160
  • Gain recognized in P&L: $42,211

Example 4: Early Termination

Scenario

Original Lease:

  • Equipment lease: Monthly payment $5,000
  • Original term: 48 months
  • Commencement: January 1, 2023
  • Initial lease liability: $220,899

Early Termination (January 1, 2025 - Month 25):

  • Lessee and lessor agree to terminate the lease early
  • Termination penalty: $15,000
  • Lease liability balance: $118,500
  • ROU asset balance: $110,250

Journal Entry (January 1, 2025)

Dr. Lease Liability                  $118,500
Dr. Loss on Lease Termination          $6,750
    Cr. Right-of-Use Asset             $110,250
    Cr. Cash (Penalty Payment)          $15,000
(To derecognize lease and recognize termination penalty)

Loss Calculation:

  • ROU Asset written off: $110,250
  • Lease Liability derecognized: ($118,500)
  • Penalty paid: $15,000
  • Net Loss: $6,750

Using Calculator Tools for Modifications

Manual calculation of lease modifications is complex and time-consuming. Our IFRS 16 Calculator includes built-in modification support:

How to Use the Modification Feature:

  1. Calculate Original Lease: Input your initial lease parameters and generate the baseline schedule
  2. Click "Add Lease Modification": Access the modification panel
  3. Enter Modification Details:
    • Effective period (e.g., Month 13)
    • New payment amount (if changed)
    • New remaining term (if extended/shortened)
    • New discount rate (revised IBR)
  4. Generate Updated Schedule: Calculator automatically:
    • Calculates revised present value
    • Determines adjustment amount
    • Updates amortization schedule from modification date forward
  5. Export to Excel: Download complete schedule showing pre- and post-modification periods

Try Modification Calculations Now

See how our calculator handles lease modifications automatically. No complex formulas required.

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