Accounting for Lease Term Modifications Under Ind AS 116 | Lessee’s Perspective

A lessee shall account for a lease modification as a separate lease or a lease modification in the existing lease. When the modification in the lease not account as a separate lease then in such case the lessee shall re-measure the lease liability by discounting the revised lease payments using a revised discount rate. The revised discount rate is determined as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the effective date of the modification if the interest rate implicit in the lease cannot be readily determined.

Further, if the lease modification is not accounted for as a separate lease, the lessee shall re-measure the lease liability by decreasing the carrying amount of the ROU asset to reflect the change in lease scope, thus recognizing any resulting gain or loss in profit or loss.

In this story, we have discussed 2 scenarios of lease modification and their accounting treatment in the lessee’s books. Scenario 1 involves a reduction in the lease term, while Scenario 2 considers an increase in the lease term.

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