Financial Reporting · Ind AS 116 Leases

Ind AS 116 Lease Modifications and Reassessment

Updated 5 October 2026 · Fact-checked

A lease modification is a change in the scope or consideration of a lease that was not in the original terms. A lessee first tests if it is a separate lease. If not, it remeasures the lease liability at a revised discount rate and adjusts the right-of-use asset, with a gain or loss for reduced scope.

Understand Lease Modifications and Reassessment

A lease is accounted for on day one. The lessee records a lease liability (present value of unpaid lease payments) and a right-of-use (ROU) asset. Later, things change. Ind AS 116 treats these changes in two different ways, and you must pick the right one.

Lease modification is a change in the scope of the lease or the consideration for it that was not part of the original terms. Examples: adding more floor space, cutting the term short, extending the term by agreement, or changing the rent by negotiation. It has an effective date, which is the date both parties agree to it.

Reassessment is different. No one changes the contract. The lessee simply revisits an estimate because of an event or a contractual formula. Examples: the lessee now decides it is reasonably certain to exercise an extension option, a change in an index or rate (such as CPI) that sets the payments, or a change in the expected amount payable under a residual value guarantee.

For a modification, the lessee first asks: is this a separate lease? It is only if (a) the scope increases by adding the right to use one or more underlying assets, and (b) the consideration rises by an amount commensurate with the standalone price of that extra scope, adjusted for the circumstances. If yes, the new lease is accounted for on its own and the old lease is untouched.

If it is not a separate lease, the lessee remeasures the old lease at the effective date. It uses a revised discount rate and adjusts the lease liability. The ROU asset is adjusted too. If the scope decreases, the ROU asset is reduced proportionately and the gain or loss goes to profit or loss. The lessor has its own rules, which depend on whether the lease is a finance or operating lease.

Key rules to remember

Separate lease test (lessee and lessor): Separate lease = increase in scope (right to use additional asset) AND increase in consideration commensurate with standalone price; Both conditions must be met. An extension of term alone or a rent change alone is not a separate lease.
Remeasurement on modification (not a separate lease): Revised lease liability = PV of revised lease payments over revised lease term at revised discount rate; Use the rate implicit in the lease for the remainder of the term if it can be readily determined. Otherwise use the lessee's incremental borrowing rate at the effective date of the modification.
Decrease in scope: Reduce ROU asset in proportion to the decrease; gain or loss = reduction in lease liability − reduction in ROU asset; Recognise in profit or loss. For other modifications, adjust the ROU asset by the remeasurement of the liability.
Reassessment with unchanged discount rate: Remeasure liability using the original (unchanged) discount rate; Applies to a change in amounts expected under a residual value guarantee, and to a change in future payments from an index or rate. Exception: if the change is in a floating interest rate, use a revised rate.
Reassessment with revised discount rate: Remeasure liability using a revised discount rate; Applies to a change in lease term and to a change in the assessment of a purchase option. Rate is the implicit rate for the remainder of the term if readily determinable, else the incremental borrowing rate at the reassessment date.
Adjustment of ROU asset after reassessment: Dr/Cr ROU asset by the amount of remeasurement of the lease liability; If the ROU asset is already reduced to zero and the liability falls further, recognise the remaining amount in profit or loss.
Lessor: finance lease modification: Separate lease if the two conditions are met; else, if the lease would have been operating had the modification existed at inception, treat as a new operating lease from the effective date; otherwise apply Ind AS 109; In the middle case, the net investment in the lease just before the effective date becomes the carrying amount of the underlying asset.
Lessor: operating lease modification: Treat as a new lease from the effective date; Prepaid or accrued lease payments relating to the original lease are treated as part of the payments for the new lease.

How to solve Lease Modifications and Reassessment questions

Use this order for any question on modification or reassessment. It stops you from mixing up the two situations.

1Decide whether the lease contract itself changed. If scope or consideration changed by agreement, it is a modification. If only an estimate or an index changed, it is a reassessment.
2For a modification, fix the effective date. All remeasurement is done at that date, so first bring the liability and ROU asset to that date.
3Apply the separate lease test. Check both conditions: additional asset added, and price commensurate with the standalone price. If both are met, account for the new lease separately and stop.
4If not a separate lease, allocate the consideration in the modified contract, decide the revised lease term, and choose the revised discount rate.
5Compute the revised lease liability as the present value of the remaining revised payments. Compare with the carrying amount just before the modification.
6If scope decreased, reduce the ROU asset proportionately and record the gain or loss on the reduced part. Adjust the ROU asset for the remaining remeasurement difference.
7For a reassessment, choose the rate: unchanged for index, rate or guarantee changes (floating rate excepted); revised for term or purchase option changes. Adjust the liability and the ROU asset by the same amount.
8Write the journal entries and then the subsequent depreciation and interest on the adjusted balances over the remaining term.

Quickest way: Three-question shortcut

When to use it: Use when a case scenario MCQ or a short written answer gives you a change and asks for the treatment or the adjusted amount.

Question 1: Did the parties agree to change the contract? Yes means modification. No means reassessment.
Question 2: For a modification, is there an extra asset AND a price at its standalone level? Yes means separate lease. No means remeasure the old lease.
Question 3: Which rate? Modification: revised rate. Reassessment: revised rate for term or purchase option, old rate for index, rate or guarantee (floating interest rate change excepted).
Then compute new PV minus old carrying liability. Put the difference in the ROU asset. Profit or loss arises only on a decrease in scope (partial or full termination), where the gain or loss is on the part terminated, or when the ROU asset is already reduced to zero.

Common mistakes in Lease Modifications and Reassessment

Treating every extension of term as a separate lease.
Students see a new period and assume a new lease.
Fix: A separate lease needs added right to use an asset plus commensurate price. A pure term extension fails the first test, so remeasure the existing liability.
Using the original discount rate when the lease term changes or a modification is not a separate lease.
Students carry over the day-one rate to save effort.
Fix: Use a revised rate at the effective date or reassessment date for modifications and for term or purchase option changes. Keep the old rate only for index, rate and guarantee changes.
Recognising the whole change in the liability in profit or loss.
Students confuse remeasurement with a gain or loss.
Fix: Adjust the ROU asset by the remeasurement. Profit or loss arises only for the proportionate decrease in scope or when the ROU asset is already nil.
In a partial termination, reducing the ROU asset by the full change in the liability.
Students ignore the proportionate method.
Fix: Reduce the ROU asset in the same proportion as the decrease in scope. The gain or loss is the difference between the liability decrease and the ROU decrease for that part.
Remeasuring as at the signing date or the year end instead of the effective date.
Dates are mixed up in scenario questions.
Fix: Update interest and depreciation up to the effective date first. Then do the remeasurement at that date.
Applying lessee rules to the lessor's books.
Students remember one set of modification rules.
Fix: Check who the question is about. A lessor tests finance versus operating classification and uses Ind AS 109 in some finance lease cases.

Worked examples

Example 1

Pranav Ltd leased a warehouse for 5 years with annual rent of ₹10,00,000 payable at each year end. At the end of year 2, after paying the second instalment, Pranav Ltd and the lessor agree to extend the lease by 2 more years, to a total of 7 years, at the same annual rent. No additional space is given. The revised discount rate at the effective date is 12%. The original rate was 10%. Present value factors: 3 years at 10% = 2.486852; 5 years at 12% = 3.604776. Show the accounting for the modification.

Show the solution

The contract is changed by agreement, so this is a modification. The effective date is the end of year 2.
Separate lease test: no additional asset is added, only the term. So the first condition fails. It is not a separate lease.
Carrying lease liability just before modification = 3 remaining payments of ₹10,00,000 at 10% = 10,00,000 × 2.486852 = ₹24,86,852.
Revised lease term from the effective date = 5 years (3 remaining + 2 extended). Revised payments are ₹10,00,000 a year at the 12% revised rate.
Revised lease liability = 10,00,000 × 3.604776 = ₹36,04,776.
Increase in liability = 36,04,776 − 24,86,852 = ₹11,17,924.
Scope has not decreased, so the increase is added to the ROU asset. Entry: Dr Right-of-use asset ₹11,17,924; Cr Lease liability ₹11,17,924.
Going forward, depreciate the adjusted ROU asset over the revised remaining term of 5 years, and charge interest at 12% on ₹36,04,776.

Answer: Not a separate lease. Lease liability is remeasured from ₹24,86,852 to ₹36,04,776 at 12%, and the ROU asset is increased by ₹11,17,924. No profit or loss arises.

Example 2

Meera Ltd leases floor space in a building. Just before a modification, the ROU asset has a carrying amount of ₹40,00,000 and the lease liability is ₹50,00,000. By agreement, Meera Ltd gives up 25% of the space from the effective date. Remaining payments are 75% of the original payments. Meera Ltd determines the revised discount rate at the effective date, and it works out to be the same as the original rate. Show the accounting.

Show the solution

The change is by agreement and reduces scope, so it is a modification. It cannot be a separate lease because no asset is added.
The standard requires a revised discount rate at the effective date. Here that revised rate happens to equal the original rate, so the present value of the remaining payments at the revised rate is 75% of the original liability.
The decrease in scope is 25%. Reduce the ROU asset proportionately: 40,00,000 × 25% = ₹10,00,000.
Reduce the lease liability for the same part: 50,00,000 × 25% = ₹12,50,000.
Gain on partial termination = 12,50,000 − 10,00,000 = ₹2,50,000, recognised in profit or loss.
Check the remaining liability: 75% of 50,00,000 = ₹37,50,000. This equals the present value of the remaining payments at the revised rate (same as the original rate), so no further adjustment is needed on the ROU asset.
Entry: Dr Lease liability ₹12,50,000; Cr Right-of-use asset ₹10,00,000; Cr Profit or loss (gain) ₹2,50,000.
Remaining balances: ROU asset ₹30,00,000 and lease liability ₹37,50,000, to be carried forward.

Answer: Meera Ltd recognises a gain of ₹2,50,000 in profit or loss. ROU asset becomes ₹30,00,000 and lease liability becomes ₹37,50,000.

Exam tips

Write the classification first: modification or reassessment. Markers give marks for that line, and it decides the rest of the answer.
Always state both conditions of the separate lease test in your answer, then say which one fails or that both are met.
Name the discount rate you use and why. Many marks are lost where numbers are right but the rate is not justified.
Show the journal entry with the ROU asset and the lease liability. In scenario MCQs, check whether the question asks for the liability, the ROU asset or the gain, and compute exactly that.
For lessor questions, state the classification test first (finance or operating had the modification applied at inception) before the accounting.

Practice questions from Ind AS 116 Leases

Lease Modifications and Reassessment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Lease Modifications and Reassessment: frequently asked questions

What is a lease modification under Ind AS 116?

It is a change in the scope of a lease or the consideration for it that was not part of the original terms. Examples are adding space, ending part of the lease, or renegotiating rent. It is accounted for from its effective date.

When is a lease modification a separate lease?

When it adds the right to use one or more underlying assets and the consideration increases by an amount commensurate with the standalone price of that addition, adjusted for the circumstances. Both conditions must be met. If either fails, you remeasure the existing lease.

Which discount rate is used when remeasuring the lease liability?

For modifications not treated as separate leases, and for changes in lease term or purchase option assessment, use a revised rate. That is the rate implicit in the lease for the remaining term if readily determinable, otherwise the incremental borrowing rate at the effective date. For changes in index-linked payments or residual value guarantees, the original rate is kept, except for floating interest rate changes.

Does remeasurement of a lease liability affect profit or loss?

Usually not. The change in the liability is adjusted against the ROU asset. Profit or loss is affected when the scope decreases, because a gain or loss arises on the part terminated, or when the ROU asset has already been reduced to zero.