Lease payments are reduced to $30,000 per year for the remaining 7 years.At the beginning of Year 4, LE and LR agree to reduce the space to 3,000 sq.No initial direct costs, lease incentives or dismantlement costs.Īt lease commencement, LE records an ROU asset and lease liability of $386,087, which is the present value of the 10 annual payments of $50,000 using the 5% incremental borrowing rate.Incremental borrowing rate at lease commencement was 5% the rate implicit in the lease was not readily determinable.Lease payments are $50,000 per year payable in arrears.Lessee LE entered into a 10-year lease for 5,000 sq.In those cases, the modification would not be accounted for as a separate lease.Įxample – Modification that decreases scope In a different scenario, assume that the annual lease payments remained unchanged from the original lease or were increased by an amount that was not commensurate with the stand-alone price for the additional office space (e.g. equivalent to the stand-alone price for the increase in scope), LE accounts for this modification as a separate lease. Because the lease payments for the additional right of use are commensurate with the market rental price for similar office space leases (i.e. This modification increases the scope because it grants LE the right to use an additional floor of office space. The lease of the additional office space was not part of the original terms and conditions of the contract. The lease payments for the additional office space are $100,000 per year, which is commensurate with the market rental price for similar office space. At the beginning of Year 6, LE and LR agree to amend the contract to grant LE the right to use an additional floor of office space in the same building for 5 years. LE’s business has since expanded and LE now requires additional office space. Lessee LE entered into a lease with Lessor LR to lease one floor in an office building for 10 years. 1Įxample – Increase in scope with corresponding increase in consideration Lease modifications are defined similarly under US GAAP. reducing building space subject to a lease, while simultaneously extending the term of the lease for the remaining space. Often, more than one modification will occur simultaneously – e.g.
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