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

Zenith Co leases an office floor for 5 years with annual payments of $100,000 in arrears. After 2 years, the lessor and Zenith agree to extend the lease term by a further 2 years at the same annual payment, which is not a separate lease. How should Zenith account for this modification?

Zenith remeasures the lease liability at the modification date using a revised discount rate and adjusts the right-of-use asset by the same amount. The extension is not a separate lease, so it is not accounted for as a new contract, and the original rate is not retained.

  1. ARemeasure the lease liability using a revised discount rate at the modification date, with a corresponding adjustment to the right-of-use assetCorrect
  2. BAccount for it as a separate new lease and leave the original liability unchanged
  3. CRemeasure the liability using the original discount rate and recognise the adjustment immediately in profit or loss
  4. DIgnore the change until the original term expires and then recognise the extension prospectively

Explanation

A lease modification that is not a separate lease and extends the term is a lessee remeasurement. The liability is remeasured using a revised discount rate at the effective date, with the adjustment made to the right-of-use asset. Using the original rate is wrong because IFRS 16 requires a revised rate for modifications that change the term.

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