The difference between the net asset and the liability at the time a capital lease is terminated. If the net asset at date of termination is greater than the remaining liability, the difference is taken as a loss; if the liability is greater (which is the normal case when a lease is early terminated), the difference is taken as a gain. The gain or loss may be offset by a cancellation penalty or, if the asset is purchased, by setting it up as an owned asset.
For an operating lease, the termination gain or loss is the amount of deferred liability or asset, respectively, accumulated from rent leveling that is removed due to the early termination of a lease. A FAS 13/IAS 17 operating lease never has a gain or loss if it expires normally.
IFRS 16 treatment:
Under IFRS-16, there are three possible causes and impacts for lease modifications:
- Does the modification result in a new lease by substance of the transaction? If yes then Recognize a new lease. A new lease will be recognized if the modification increases the scope of the lease by adding the right of use of the assets and consideration is increased by a proportion similar to the increase in scope due to modification
- If the modification does not result in a new lease and the scope of the lease is not reduced or has been increased, and consideration is increased disproportionately to the increase in scope then the lease liability needs to be recalculated using the updated contractual terms, such as payment or lease term, with an updated discount rate. In this case, the ROUA and Lease liability will be proportionately adjusted for the modification.
- If the modification does not result in a new lease and the scope of the lease is reduced, then the ROUA needs to be adjusted and a gain/loss is to be recognized.