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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Alder plc leases a warehouse for 5 years under IFRS 16. At the start of year 3, the lessee and lessor agree to extend the term by 3 years at a rate in line with the then-current market rate. The extension does not add a separate right of use asset. Which accounting treatment applies to Alder as lessee?

The lessee remeasures the lease liability at the modification date using a revised discount rate and adjusts the right-of-use asset by the same amount, because a term extension alone does not create a separate lease under IFRS 16.

  1. AAccount for the extension as a separate new lease
  2. BRemeasure the lease liability using a revised discount rate at the modification effective date, with a corresponding adjustment to the right-of-use assetCorrect
  3. CRemeasure the lease liability using the original discount rate and recognise any difference in profit or loss
  4. DIgnore the change until the original term expires

Explanation

An extension of term is a modification that does not add a right of use of a separate underlying asset, so it is not a separate lease. The lessee remeasures the liability by discounting revised payments at a revised rate at the modification effective date, and adjusts the right-of-use asset. Using the original rate is wrong because the modification requires a revised rate.

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