Calculation of Lease Liability After Reduction of Agreed-upon Lease Space | Ind AS 116

The lessee can account for the lease modification either as a separate lease or as a lease modification in the existing lease. For a lease modification that is not accounted for as a separate lease, at the effective date of the lease modification a lessee shall:

• Allocate the consideration in the modified contract;
• Determine the lease term of the modified lease; and
• 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, for a lease modification that is not accounted for as a separate lease, the lessee shall account for the re-measurement of the lease liability by decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease for lease modifications that decrease the scope of the lease. The lessee shall recognize in profit or loss any gain or loss relating to the partial or full termination of the lease. And, by making a corresponding adjustment to the right-of-use asset for all other lease modifications.

In this story, we have discussed the calculation of lease liability in lease modification after reducing the agreed-upon lease space, which is not considered a separate lease.

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