FRS 116 Leases – Lease Modifications for a Finance Lease

FRS 116 Leases – Lease Modifications for a Finance Lease

Similar to other leases, there is a possibility where there will be modifications to the finance leases. Lease modifications refer to the alterations that happen on the scope or consideration of the lease which was not part of the lease’s original terms and conditions. If this happens to a finance lease, the lessors need to know how they should manage the change, that is, to identify whether they should treat the modification as a separate lease or not.

The modification in a finance lease needs to meet two requirements for the lessor to account for it as a separate lease. Firstly, the modification has caused an increase in the scope of the finance lease as it has added the right of using one or more underlying assets. Secondly, the consideration for that lease (Also see FRS 116 Leases – Recognition Exemptions) has increased by a sum that equals to the stand-alone price for the extension of scope as well as any suitable adjustments made on the stand-alone price.

If a modification that the lessor has made to the finance lease should not be treated as a separate lease, it should manage the modification using a different method from those that should be treated as separate leases. For the modifications that do not need to be dealt with as a new lease, the lease may either become an operation lease upon the inception date or its categorisation may not change.

If at the inception date when the modification starts to apply, the lease will fall under the category of the operating leases, then the lessor needs to treat the lease modification as a new lease since the day the modification comes into effect. Also, it has to measure the underlying asset’s carrying amount as the net investment in the lease (Also see FRS 116 Leases – Reassessing Lease Liability) before the lease modification starts to apply. If not, the lessor should implement the requirements specified in FRS 109: Financial Instruments.

Handling lease modifications correctly is crucial to the lessor as doing so avoids mistakes in the financial statements. This article may be helpful for those who do not know the accounting (Also see The Importance of Accounting Procedures) treatments related to the lease modification in finance leases. If further assistance is needed, it is more advisable for them to contact an accounting firm in Singapore. The professionals will be able to lend a helping hand so that the lessors can have a more in-depth understanding of the modifications as well as the corresponding accounting treatments required.

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