EZLease takes the following steps to determine how to account for a change in a finance lease:
No change in the lease term (or term is shortened)
FAS 13/IAS 17
The lease is tested from inception using the original assumptions (fair value, incremental borrowing rate) and the new rent information.
• If the lease is still finance, the asset and liability are adjusted by the change in the present value of the lease payments.
• If the lease comes up operating from inception, it is retested as of the date of modification, using updated assumptions and only the rents from that date to the end of the lease.
• If the lease is finance under this test, then the asset and liability are adjusted by the change in the present value of the lease payments.
• If the lease is operating under both tests, the finance lease is terminated and a new operating lease is set up effective at the date of modification.
ASC 842/IFRS 16/GASB 87
The lease is tested as of the revision date. For ASC 842 only, if it comes up operating, the finance lease is terminated and replaced with an operating lease, with the asset and liability transferred from finance to operating accounts. The discount rate is updated to reflect current circumstances, and the revision to the present value of the rents is applied to both the asset and the liability. The lease then continues using appropriate accounting.
In some cases, a lease will test as operating under the ASC 842 standard at the revision date when the lease was originally finance, even if the rent due is greater than or equal to what was originally agreed. In such situations, EZLease will keep the lease finance.
Lease term is extended
All standards
This includes the exercise of an option period (including recognizing its exercise as “reasonably assured” as defined in ¶5f). The lease is not retested from inception, but only as of the date of modification, using updated assumptions and only the rents from that date to the new end of the lease.
• If the lease is finance under this test, then the asset and liability are adjusted by the change in the present value of the lease payments.
• If the lease is operating, the finance lease continues unchanged until its normal expiration, and the extension is set up as a new operating lease.
Increase in scope of asset leased (additional right of use)
ASC 842/IFRS 16/GASB 87
If the terms of the increase are commensurate with the standalone price for such a lease, the increase is treated as a separate contract.
If the terms are concessionary, the existing lease is revised (and, for ASC 842, tested for classification). If the increased asset is made available in the future, two separate records are required in EZLease; you must allocate the rent between the original and new assets, and any rent allocated to the new asset that is paid before the new asset is acquired is treated as prepaid rent. EZLease does not track prepaid rent before the lease starts; it should be shown as rent paid the first day of the lease term, which will be part of the right-of-use asset calculation but not the initial liability, but reports run between the modification date and the begin date of the new asset record will not show its presence.
Decrease in scope of asset leased (partial termination)
ASC 842/IFRS 16/GASB 87
For IFRS 16 and GASB 87, this includes a reduction in the lease term.
The net right-of-use asset is reduced by the proportion of the liability removed; a gain or loss is recognized for the difference between the asset and liability removed.
See also revision of an operating lease