EZLease takes the following steps to determine how to account for a change in an operating lease:
ASC 842
Same treatment as finance lease
FAS 13/IAS 17
No change in the lease term (or term is shortened): 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 operating, any deferred rent liability or asset is carried over and rent leveling is recalculated using the new rent.
• If the lease comes up capital 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 operating under this test, any deferred rent liability or asset is carried over and rent leveling is recalculated using the new rent.
• • If the lease is capital under both tests, the operating lease is terminated and a new capital lease is set up effective at the date of modification.
Lease term is extended: 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 operating under this test, any deferred rent liability or asset is carried over and rent leveling is recalculated using the new rent.
• If the lease is capital, the operating lease is terminated, and a new sales or direct financing lease is set up effective at the date of modification.
If an operating lease becomes capital, by default, any rent leveling asset or liability is removed and a termination gain or loss recognized. You can optionally roll it over to the capital lease (entering it in the Deferred Rent Rollover field) and amortize it over the new lease term.
Short-term or low-value lease
ASC 842/IFRS 16/GASB 87
If a lease previously classified as short-term or low-value is modified so that it no longer qualifies for those classifications, the existing lease is terminated and a new lease set up for the remaining term.