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

Orion Co leases machinery for 8 years. In year 3 the lessor and Orion agree to add the right to use a second identical machine for the remaining 5 years, at a price that reflects the standalone price for the additional machine. How should Orion account for the modification?

The modification is a separate lease because it adds the right to use an additional asset at a price consistent with its standalone price. Orion recognises a new right-of-use asset and liability for the second machine and leaves the original lease accounting unchanged.

  1. AAs a separate lease, accounted for alongside the original lease which remains unchangedCorrect
  2. BAs a remeasurement of the original lease liability using a revised discount rate
  3. CAs a termination of the original lease and a gain or loss recognised in profit or loss
  4. DAs an operating expense in the periods the second machine is used

Explanation

IFRS 16 treats a modification as a separate lease when it adds the right to use one or more underlying assets and the consideration increases by an amount consistent with the standalone price. The original lease is therefore not remeasured. Remeasurement applies only when these conditions are not both met.

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