Remeasuring the Lease liabilities

[Yakub02]

Remeasuring the lease liability -

Lease liabilities must be remeasured to reflect changes in circumstances. Circumstances might change over the life of the lease leading to a change in the lease payments. This could be because the lease term changes, perhaps due to a reassessment of whether an option to extend or terminate a lease is made.

Other changes might occur due to a rent review. A review of rentals would be provided in the contract but any revision to the rentals following the review might not have been anticipated in the original forecast of rentals.

A lease liability is remeasured by discounting the revised lease payments:

 using a revised discount rate when there is a change in the lease term or in the assessment of an option to purchase the underlying asset; or

 by discounting the revised lease payments at the original rate when there is a change in the amounts expected to be payable under a residual value guarantee or in future lease payments resulting from a change in an index or a rate used to determine those payments (e.g. following a market rent review)

Lease modification: A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term).

 

[Yakub02]

If the lessee can cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee;

 Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and

 The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

it can normally be concluded that substantially all the risks and rewards incidental to ownership are transferred to the lessee.

 

[Yakub02]

These indicators are not always conclusive. Classification should always be based on the substance of the agreement taking account of all information.

Leases are classified at the inception of the lease. Sometimes a lessee and lessor agree to change the provisions of a lease and the changes might be of a sort that would have changed the lease classification if the new terms had been in effect at the inception of the lease.

In these cases the revised agreement is regarded as a new agreement over its term

However, changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased property), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes