IFRS 16 Lease Modifications: Classification, Discount Rates and Journal Entries

1. What is a lease modification under IFRS 16, and what does the definition actually exclude?

Example: which of these four changes to the same lease is a modification?

A lessee holds a ten-year lease of a distribution unit at GBP 200,000 a year. Four things happen in different years. Only two of them are modifications.

Rows one and three produce the same cash. They do not produce the same accounting, and Unit 2 shows the size of the difference.

Local FAQs

Is a change that only affects payments the lessee never capitalised still a modification? Yes. The Appendix A definition turns on a change in scope or consideration, not on whether the affected payments were inside the lease liability. Renegotiating a turnover rent from three per cent of sales to two per cent changes the consideration for the lease even though neither figure was ever discounted. The liability may not move, but the contract has been modified, and the lease term, the classification of the payments and the disclosure all have to be revisited on that basis. PwC reaches the same conclusion for the equivalent ASC 842 definition.

Does a change to a non-lease component make it a modification? If the contract containing the lease is amended, the amendment is assessed under IFRS 16, and IFRS 16.45(a) sends you back to IFRS 16.13 to 16.16 to reallocate the consideration between the lease and non-lease components on relative stand-alone prices. Adding a maintenance service priced at its stand-alone price will normally leave the lease component's allocation unchanged, but the reallocation still has to be performed rather than assumed.

Is a lease surrender in full a modification? A full termination is dealt with by the same paragraph as a partial one. IFRS 16.46(a) refers to "the partial or full termination of the lease", so the entire right-of-use asset and lease liability come off and the difference, including any surrender premium, goes to profit or loss.

Potential risks

The risk that recurs most is the one in the effective date definition. Lease amendments are commonly negotiated in one period and take effect in another, and the accounting population is usually built from the property team's occupancy data rather than from the legal agreement date. That produces modifications recognised in the wrong period, and because IFRS 16.45(c) fixes the discount rate at the effective date, it also produces the wrong rate. The second risk is the reverse: treating a contractual step-up as a renegotiation because the paperwork happens to include a signed side letter confirming the new figure. Confirming a mechanism is not renegotiating it, and the original lease document, not the side letter, is the evidence.

2. What is the difference between a lease modification and a lease reassessment, and why is the usual shorthand wrong?

Read down the discount rate column and the shorthand collapses. Two of the six rows use an unchanged rate and four use a revised one, and the split does not follow the modification boundary. Read down the last column instead and the picture is clean: exactly one row can produce a gain or a loss.

Worked example 1: what does the same rent increase cost, depending on where it came from?

A lessee took a ten-year lease of a distribution unit on 1 January 2021. Rent is GBP 200,000 a year in arrears. The interest rate implicit in the lease cannot be readily determined, and the incremental borrowing rate at commencement was 5 per cent. There are no initial direct costs, incentives or dismantling obligations, so the right-of-use asset and the lease liability were both GBP 1,544,347 at commencement, and the asset is depreciated straight line over the ten-year term.

At 1 January 2026 five years remain. The lease liability is GBP 865,895 and the right-of-use asset is GBP 772,173. On that date the rent rises to GBP 214,000 for the remaining five years. The lessee's incremental borrowing rate is now 7 per cent.

Case A. The increase comes from the CPI clause in the original lease. This is IFRS 16.42(b), so IFRS 16.43 requires the original 5 per cent rate. The remeasured liability is the present value of five payments of GBP 214,000 at 5 per cent, which is GBP 926,508.

Case B. The increase is a renegotiation, with no other change. Consideration has changed in a way the contract did not provide for, so Appendix A is met. No underlying asset has been added, so IFRS 16.44 cannot apply. Scope has not decreased, so IFRS 16.46(b) applies, and IFRS 16.45(c) requires the revised rate of 7 per cent. The remeasured liability is the present value of five payments of GBP 214,000 at 7 per cent, which is GBP 877,442.

Same cash, same five years, same asset. The right-of-use asset ends at GBP 832,786 under Case A and GBP 783,720 under Case B, a difference of GBP 49,066, and the liability differs by the same amount. Over the remaining five years Case A carries GBP 49,066 more depreciation and Case B carries GBP 49,066 more interest, so total expense is identical and only the split between operating profit and finance cost moves. On a portfolio of several hundred leases that split is not immaterial, and it is decided entirely by which document the increase came from.

Local FAQs

A rent review clause says the rent will be reset to open market value, and the parties negotiate that value. Modification or reassessment? Reassessment. IFRS 16.42(b) names market rent reviews specifically. The parties are negotiating the number the original mechanism produces, not amending the mechanism. If they also agree to change the review frequency, or to add a cap, that part is a modification.

Does a rent concession that is not covid-related get the expedient? No. IFRS 16.46A and 16.46B were drafted narrowly and IFRS 16.46B(a) to (c) has to be met in full. An ordinary commercial rent holiday is assessed under Appendix A like anything else, and is normally a modification.

The right-of-use asset is already nil after impairment and the liability falls. What happens? On a reassessment, the final sentence of IFRS 16.39 sends the excess to profit or loss. On a modification under IFRS 16.46(b) the standard says to make a corresponding adjustment to the right-of-use asset, and where that would take the asset below zero the same logic applies, because an asset cannot be negative. State the treatment and the reasoning in the file, since the standard does not spell this case out for modifications.

Potential risks

The dominant risk in this unit is silent misclassification, because both routes remeasure the liability and adjust the right-of-use asset, so nothing looks obviously wrong in the ledger. Nothing reconciles, nothing fails to balance, and the error surfaces only if someone tests the rate used against the paragraph relied on. A practical control is to require the rate field and the paragraph field to be populated together in the lease system, and to exception-report every entry where a revised rate has been used with a IFRS 16.42 or 16.43 classification, or an unchanged rate with a IFRS 16.45 classification. The second risk is more subtle: an entity that is close to a gearing covenant has an incentive to classify a rent increase as a modification, because the revised rate is usually higher and the liability lands lower. That incentive should push the challenge, not the conclusion.

3. When is a lease modification accounted for as a separate lease under IFRS 16.44?

Worked example 2: what if the lessee adds a floor at market rent?

Continue the four-floor office lease used later in this article. A lessee has a ten-year lease of four floors from 1 January 2021 at GBP 400,000 a year, so GBP 100,000 a floor. On 1 January 2026, with five years to run, the lessor offers a fifth floor in the same building for the remaining five years at GBP 105,000 a year. Comparable fifth-floor space in the building is letting at GBP 110,000 to GBP 115,000, and the lessor has quantified the saving on agent's fees and a void period at around GBP 5,000 a year. The lessee's incremental borrowing rate is 7 per cent.

Condition (a) is met, because a fifth floor is an additional underlying asset. Condition (b) is met, because GBP 105,000 sits inside the stand-alone range once the contract-specific saving the lessor itself has quantified is taken into account. This is a separate lease.

The existing four-floor lease is not touched. Its liability continues to unwind at the original 5 per cent, its right-of-use asset continues to depreciate on the original schedule, and no gain or loss arises. That is the whole point of IFRS 16.44: where the pricing is arm's length, there is nothing about the original bargain to revisit.

Change one fact and the answer changes completely. Suppose the lessor offers the fifth floor at GBP 60,000 because the lessee agreed to extend all five floors by three years. Condition (b) now fails, and IFRS 16.B2 may also combine the two limbs into one contract. The whole arrangement becomes a single non-separate modification of the existing lease, remeasured under IFRS 16.45 at 7 per cent, with the discount on the new floor spread across the entire modified liability rather than sitting on the new floor alone.

Local FAQs

The lessee added floor space in the same building. Is that one underlying asset or two? It depends on whether the space is a separate lease component under IFRS 16.B32, which asks whether the lessee can benefit from use of the space on its own or with readily available resources, and whether the space is highly dependent on or highly interrelated with the rest. Separately lettable floors normally are separate components. A wider corridor on an existing floor is not.

What evidence supports "commensurate with the stand-alone price"? Comparable lettings in the same building or immediate area at or near the effective date, an independent valuation, or the lessor's own quoted asking rent, together with an explicit quantification of any contract-specific adjustment. A statement that the rent is at market, with nothing behind it, is not evidence. The paragraph asks for a price comparison and the file needs one.

If the increase in scope is priced above stand-alone price, is it still a separate lease? IFRS 16.44(b) says the consideration must increase by an amount commensurate with the stand-alone price, and an overpricing is as much a failure of that condition as an underpricing. In practice overpricing is rare and usually signals that something else in the arrangement is being compensated, which is itself a reason to look at IFRS 16.B2.

Potential risks

The audit challenge here is almost always evidential rather than technical. Management concludes that additional space was taken at market rent, the conclusion is plausible, and there is nothing on file beyond the assertion. The consequence of getting it wrong is larger than it looks: a separate lease leaves the original liability alone, while a failed condition (b) drags the entire original lease into a remeasurement at a new rate. On a large lease that difference can be several million. The second risk is the extension error, and it is worth running as a specific test. Filter the modification population for anything described as an extension, a renewal or a reversionary lease, and confirm that none of it has been recorded as a separate lease. IFRS 16.44(a) makes that outcome impossible, so any hit is an error by definition rather than a judgement to be discussed.

4. Which discount rate applies to a lease modification, and at what date is it measured?

Illustration: what does taking the rate on the wrong date cost?

A lessee with a 31 December year end agrees a modification on 31 March. Six annual payments of GBP 250,000 remain under the modified lease. The lessee's incremental borrowing rate for that remaining term was 5.5 per cent on 31 March and 7.5 per cent by 31 December.

Six per cent of the balance, on one lease, from a date field. The error also understates the interest charge for the rest of the lease and overstates depreciation, so it does not wash out of profit in a single period. It is invisible in the journal, because a liability discounted at the wrong rate still balances.

Local FAQs

Does a modification change the rate on a separate lease under IFRS 16.44? No. A separate lease is a new lease measured under IFRS 16.26 using its own rate at its own commencement date. The original lease keeps its original rate, because nothing about the original lease has been remeasured.

The modification only shortens the term. Do we still need a new rate? Yes. IFRS 16.45(c) has no exception for modifications that reduce anything. The revised rate applies to the remaining payments of the modified lease. Note that a shortening agreed by renegotiation is a modification, while a shortening because the lessee has become reasonably certain to exercise an existing break clause is a reassessment under IFRS 16.20 and 16.40. Both revise the rate, but only the first can create a gain.

Can the incremental borrowing rate be set at portfolio level for modifications? IFRS 16.26 and 16.45(c) refer to the lessee's incremental borrowing rate, which Appendix A defines by reference to a similar term, similar security and a similar economic environment. A portfolio rate is a practical approximation, and it becomes harder to support on a modification, because the remaining term is usually short and short-term rates diverge most from a blended portfolio average. Where a modification leaves two years to run and the portfolio rate is built on a seven-year average, the approximation is doing real work and should be tested rather than inherited.

Potential risks

Three specific failures recur. The rate is taken at the reporting date rather than the effective date, which is a systems issue and affects every modification in the period once it exists. The lease term is not redetermined under IFRS 16.45(b), so options are carried forward on the pre-modification assessment even though the commercial position has plainly changed, which is exactly the moment IFRS 16.19 says to look again. And the consideration is not reallocated under IFRS 16.45(a) where the amendment touched a non-lease component, so service charge movements end up capitalised inside the lease liability. None of the three is visible from the journal alone, and all three are testable against the amendment document in a few minutes.

5. How do you account for a lease modification that decreases the scope of the lease?

Worked example 3: what are the entries when a lessee gives back one of four floors?

A lessee holds a ten-year lease of four floors from 1 January 2021. Rent is GBP 400,000 a year in arrears. The interest rate implicit in the lease cannot be readily determined and the incremental borrowing rate at commencement was 5 per cent. The right-of-use asset and lease liability were both GBP 3,088,694 at commencement and the asset is depreciated straight line over ten years.

On 1 January 2026, with five years to run, the parties agree that the lessee gives back one of the four floors from that date and that rent falls to GBP 310,000 a year for the remaining five years. The lessee's incremental borrowing rate is now 7 per cent.

The rent has not fallen proportionately. Three quarters of GBP 400,000 is GBP 300,000, and the parties agreed GBP 310,000. That is deliberate and it is the common case: a lessor releasing a floor mid-term rarely does so at exactly pro-rata pricing. The extra GBP 10,000 a year is a change in consideration, and it belongs in step two, not in the gain.

One point to settle before the numbers, because it is the first thing a reviewer should ask. Step one reduces the right-of-use asset and the lease liability by the same 25 per cent of their pre-modification carrying amounts. That is what Illustrative Example 17 does, applying a 50 per cent scope reduction to both balances. The alternative framing on the liability side is to remove the present value of the payments attributable to the surrendered floor at the original rate, which is five payments of GBP 100,000 at 5 per cent. Both give GBP 432,948 here, because the original rent was level across the four floors. Where the rent is not level across the components, the two diverge and the second is the better one, since it removes what the surrendered component actually cost.

Carrying amounts immediately before the modification:

Step one, the partial termination. One of four floors has gone, so 25 per cent of the right of use has been terminated. Reduce both carrying amounts by 25 per cent and take the difference to profit or loss.

Step two, the remeasurement. The modified liability is the present value of five payments of GBP 310,000 at the revised rate of 7 per cent, which is GBP 1,271,061. The liability after step one was GBP 1,298,843. The difference of GBP 27,782 is a reduction, and IFRS 16.46(b) logic puts it against the right-of-use asset.

The result is worth pausing on. The lessee is now paying GBP 310,000 a year where the retained three floors were previously carried at GBP 300,000, so the annual cash outflow on the retained space has gone up. Yet the lease liability has gone down by a further GBP 27,782, because the rate used to discount it moved from 5 per cent to 7 per cent and the rate effect is larger than the payment effect. Anyone reviewing the entry who expects a rent increase to increase a liability will look at journal 2 and assume it is the wrong way round. It is not. This is exactly why IFRS 16.45(c) is the sentence that needs to be on the face of the working paper.

Local FAQs

Where in the income statement does the gain go? IFRS 16.46(a) requires it in profit or loss and says nothing more. IAS 1.85 requires additional line items where relevant to an understanding of performance, and for periods beginning on or after 1 January 2027 IFRS 18 will require classification into its defined categories. A gain from a lessee handing back trading space arises from derecognising an operating asset, not from a financing transaction, so operating profit is normally the right home. Putting it in finance income because the liability is a financial-looking balance is the error to avoid.

Is the gain the same as a termination penalty? No, and they can run in opposite directions. A penalty paid to the lessor to secure the release is consideration and is dealt with through the measurement of the lease payments, while the gain is the difference between the asset and liability derecognised. A lessee can pay a penalty and still report a net gain, which looks odd on the face of it and is a frequent subject of audit committee questions.

What if the right-of-use asset has already been impaired? Impairment under IAS 36, applied through IFRS 16.33, reduces the carrying amount before the modification, so the proportionate reduction in step one is applied to the impaired figure and the gain is correspondingly larger. Sequence matters, and the impairment test at the reporting date before the modification is the one that governs.

Potential risks

The largest single risk in this article sits here. A gain under IFRS 16.46(a) is a credit to operating profit that requires no cash and no third party to agree the amount, and it arises in exactly the years when management is under pressure on profit, because estate reduction and profit pressure travel together. It is measured on an unspecified basis, so the number is genuinely sensitive to the method chosen, and there is no external confirmation available for it. My view is that this combination is unusual enough to deserve an explicit fraud risk consideration rather than a substantive analytical procedure. Practical tests: agree the terminated proportion to the amendment rather than to a management schedule; recalculate step one on pre-modification carrying amounts and confirm the original rate was used; confirm the same basis was applied to every modification in the period; and check whether any part of the rate change has been pulled into the gain.

6. How do you account for every other lease modification, including an extension?

Worked example 4: what happens when the term is extended and the rent rises?

A lessee took a ten-year lease of a warehouse on 1 January 2021 at GBP 150,000 a year in arrears. The implicit rate was not readily determinable and the incremental borrowing rate at commencement was 5 per cent, so the right-of-use asset and lease liability were both GBP 1,158,260 and the asset is depreciated over ten years. There is no extension option in the lease.

On 1 January 2029, with two years to run, the parties agree to extend the term by five years and to set the rent at GBP 170,000 a year for the whole of the remaining seven years. The lessee's incremental borrowing rate is now 6.5 per cent.

Test IFRS 16.44 first. Condition (a) fails, because no underlying asset has been added. The same warehouse is being used for longer. So this cannot be a separate lease, and it never could have been, whatever the pricing.

The right-of-use asset becomes GBP 885,109 and is depreciated over the modified term of seven years, which is GBP 126,444 a year against GBP 115,826 before. Nothing reaches profit or loss on the day of the modification, and the whole of the change is recovered through a higher depreciation charge and a higher interest charge over the extended term.

Local FAQs

Can a rent-free period be a modification? Yes, where it is agreed rather than contractual. A rent-free period granted by renegotiation changes the consideration in a way the original terms did not provide for, so Appendix A is met, IFRS 16.45(c) requires a revised rate, and IFRS 16.46(b) puts the whole adjustment into the right-of-use asset. The liability falls and the asset falls with it. No credit to profit or loss arises, which surprises preparers who expect a rent holiday to show up as a saving in the year it is granted.

The modification adds an asset but at a heavy discount. Where does it go? IFRS 16.44 fails at condition (b), so the whole arrangement, including the new asset, is one modification of the existing lease under IFRS 16.45. The lease term is determined for the modified contract, the consideration is reallocated across all lease components, and the entire remeasured liability is discounted at one revised rate. Deloitte's Lease modifications, ten comprehensive examples works this fact pattern through in detail, and notes that where the added space is made available at the effective date and both components carry the same rate and term, the allocation between them does not change the totals.

What if the extended term makes the right-of-use asset unrecoverable? IFRS 16.33 applies IAS 36 to right-of-use assets, and a modification that increases the carrying amount of the asset by GBP 653,457 in one entry is an indicator worth testing. The remeasurement itself does not trigger an impairment test automatically, but the resulting carrying amount has to be recoverable, and a lessee extending a lease on premises it is not using is exactly the case where it will not be.

Potential risks

Two things go wrong here. The first is a gain appearing where none can exist, usually because a modification that both extends the term and reduces the floor area has been treated as a single IFRS 16.46(b) remeasurement rather than being split as Unit 7 sets out, or because the preparer has calculated the difference between the old and new liability using two different rates and taken part of it to profit or loss. The second is the depreciation period. A modification changes the lease term, and the right-of-use asset has to be depreciated over the modified term from the effective date under IFRS 16.32. Lease systems frequently remeasure the liability correctly and leave the depreciation schedule on the original term, which understates or overstates the charge for the rest of the lease and is invisible in the modification journal itself.

7. What happens when one amendment both increases and decreases the scope of a lease?

Worked example 5: what if the lessee gives back a floor and extends the rest?

Take the four-floor lease from worked example 3 again. Ten years from 1 January 2021, rent GBP 400,000 a year in arrears, incremental borrowing rate 5 per cent at commencement, right-of-use asset and lease liability GBP 3,088,694 at commencement. At 1 January 2026 the liability is GBP 1,731,791 and the asset is GBP 1,544,347.

This time the parties agree two things on 1 January 2026. The lessee gives back one of the four floors, and the term on the remaining three floors is extended by four years, so nine years now run from 1 January 2026. Rent for the modified lease is GBP 300,000 a year. The lessee's incremental borrowing rate is 7 per cent.

IFRS 16.44 is tested first and fails at condition (a), because nothing has been added. There is one modification.

Step one, the decrease in scope. One of four floors has been terminated, so 25 per cent of the right of use has gone. This is measured on the pre-modification carrying amounts, at the original rate, exactly as in worked example 3.

Step two, everything else. The modified liability is the present value of nine payments of GBP 300,000 at 7 per cent, which is GBP 1,954,570. The liability after step one was GBP 1,298,843. The increase of GBP 655,727 is the combined effect of the four extra years and the rate change, and IFRS 16.46(b) sends all of it to the right-of-use asset.

Note the shape of the answer. The lessee has reduced its estate by a quarter and its lease liability has gone up, from GBP 1,731,791 to GBP 1,954,570, because four extra years on three floors outweighs one floor released for five. At the same time it reports a gain of GBP 46,861 in operating profit. A reader looking only at the income statement sees a credit; a reader looking only at the balance sheet sees a larger commitment. Both are correct, and the disclosure has to let a reader see both, which is the subject of Unit 10.

Local FAQs

What if the amendment adds a genuinely new asset at market rent and shortens the term on an existing one? Split them. The addition meets IFRS 16.44 and is a separate lease measured on its own. The shortening is a modification of the original lease under IFRS 16.46(a). The two are accounted for independently, and IFRS 16.B2 should be considered to confirm the pricing of each really is independent rather than the product of one package negotiation.

Does the order matter if scope only decreases? Yes, and worked example 3 shows why. Even with no increase in scope, running the termination and the remeasurement together lets the rate change into the gain.

Can a single amendment produce both a gain and a separate lease? Yes. A lessee surrendering one building and taking another at arm's length rent in the same deed will recognise a gain on the surrender under IFRS 16.46(a) and a new lease under IFRS 16.44, provided IFRS 16.B2 does not combine the two limbs. If it does, there is one contract and no separate lease.

Potential risks

Combined amendments are where the lease system is most likely to be overridden manually, and manual overrides in this area are rarely documented to the standard the transaction deserves. Ask for the calculation rather than the journal. The specific things to look for are a single net entry with no split between IFRS 16.46(a) and 16.46(b), a gain calculated on post-modification rather than pre-modification carrying amounts, and a modified lease term that has not been redetermined under IFRS 16.45(b) across all the components in the amended contract.

8. How does a lessor account for a lease modification under IFRS 16?

The asymmetry is real and it is not a drafting accident. The same amendment to the same building can produce a gain in the lessee's operating profit under IFRS 16.46(a) and nothing at all in the lessor's, because IFRS 16.87 is entirely prospective. Anyone reconciling the two sides of a group's intra-group leases needs to expect that, rather than treat it as an error.

Local FAQs

Does a lessor reassess lease classification when an operating lease is modified? IFRS 16.87 tells the lessor to account for the modification as a new lease from the effective date, and a new lease is classified under IFRS 16.61 to 16.66 on its own terms. So the classification of the modified lease is determined, and an operating lease can become a finance lease on modification where, for example, a substantial extension now covers the major part of the remaining economic life.

An intermediate lessor subleases space it holds under a head lease. Which set of rules applies? Both, separately. The head lease modification is accounted for as a lessee under IFRS 16.44 to 16.46, and the sublease modification is accounted for as a lessor under IFRS 16.79, 16.80 or 16.87 depending on the sublease's classification. IFRS 16.B58 classifies a sublease by reference to the right-of-use asset arising from the head lease rather than the underlying asset, and a head lease modification that shortens the term can therefore change the sublease's classification as a knock-on effect.

Can a lessor recognise a gain on a finance lease modification? Through IFRS 16.80(b) and IFRS 9, yes. If the modification is substantial enough to fail the IFRS 9.3.2.3 derecognition test, the existing net investment is derecognised and a new one recognised at fair value, with the difference in profit or loss. If it is not substantial, IFRS 9.5.4.3 requires the gross carrying amount to be recalculated at the original effective interest rate with the difference recognised immediately. Either way there is an income statement effect, which is the opposite of the operating lessor answer.

Potential risks

Lessor modification accounting is under-audited relative to lessee accounting, because IFRS 16 changed so little for lessors that the area is often assumed to be unchanged from IAS 17. Two things did change. IFRS 16.80 introduced a route into IFRS 9 that IAS 17 did not have, and it is frequently missed entirely, with finance lease extensions being accounted for by simply re-running the amortisation schedule. And the accrued or deferred straight-line balance under IFRS 16.87 is written off on modification more often than it is carried forward, which pulls income into the wrong period. Both are testable directly against the paragraph.

9. Is the covid-19 rent concession expedient in IFRS 16.46A still available, and what about benchmark reform?

Local FAQs

We applied the expedient in 2021 and 2022. Do the comparatives change now? No. The expedient was validly applied when the conditions were met, and IFRS 16.46A is not withdrawn. Nothing is restated. The only current consequence is that a rent concession negotiated now is assessed on ordinary principles, so the accounting for two economically similar concessions three years apart is different, and the accounting policy note should say why rather than leaving the reader to work it out.

Is a deferral of rent, with no reduction, a modification at all? A pure deferral that leaves total consideration unchanged still changes the timing of the lease payments, so it changes the consideration for the lease in present value terms and meets the Appendix A definition where it was not provided for in the contract. It is normally remeasured under IFRS 16.45 at a revised rate, and because the total cash is unchanged the effect is small but not nil.

Does the benchmark reform expedient apply to a lease that was renegotiated at the same time for commercial reasons? IFRS 16.106 answers this directly. Where modifications are made in addition to the reform-driven one, the lessee applies the ordinary requirements of the standard to all of them, including the reform-driven part. The expedient does not survive being bundled with a commercial renegotiation.

Potential risks

The risk here is guidance drift rather than judgement. A large volume of firm material, training content and software documentation on IFRS 16 rent concessions was written between May 2020 and 2021, and much of it still carries the 30 June 2021 date and describes the expedient as an available election. A preparer researching a current concession will find that material first. The control is to read IFRS 16.46B in the currently effective standard rather than any summary of it, and to date every source used in the file. The second risk is on the reform expedient: economic equivalence in IFRS 16.105(b) is a real test with a real threshold, and applying the expedient to a change that also moved the margin removes a revised discount rate that the standard required.

10. What does IFRS 16 actually require a company to disclose about lease modifications?

Local FAQs

Where should a modification gain be presented in the income statement? Under IAS 1, which remains the effective standard for periods before 1 January 2027, IAS 1.85 permits and IAS 1.97 requires additional presentation and disclosure for material items. Under IFRS 18, effective for periods beginning on or after 1 January 2027, the answer becomes more precise. A lease liability is a liability arising from a transaction that does not only involve the raising of finance, so IFRS 18.59(b) applies. IFRS 18.61 then confines the financing category for such liabilities to interest income and expenses and to income and expenses arising from changes in interest rates. A gain under IFRS 16.46(a) is neither, because the two-step mechanic deliberately keeps the rate change out of it. IFRS 18.52 makes the operating category the residual, so the gain is classified as operating. My view is that operating is also the right answer under IAS 1 today, and that companies presenting modification gains within finance income are anticipating a classification that IFRS 18 will not give them.

Does a modification need to be disclosed as a significant judgement? The classification decision itself often does. Whether a change is a modification or a reassessment, whether IFRS 16.44(b) was met, and the basis chosen for the proportionate reduction under IFRS 16.46(a) are all judgements that change reported numbers, and IAS 1.122 requires disclosure of judgements that have the most significant effect on the amounts recognised.

Is a movement table for right-of-use assets required? Not by IFRS 16.53, which requires only additions and the closing carrying amount by class. Most companies present one anyway, because IFRS 16.51 is difficult to meet without it and because users expect the same rollforward they get for property, plant and equipment under IAS 16.73(e). The absence of a mandatory rollforward is the structural reason modification disclosure is as thin as it is.

Potential risks

The audit risk in this unit is that compliance and usefulness have come apart. A lease note can tick every item in IFRS 16.53 and leave a reader unable to tell that a company recognised a material credit in operating profit from handing back property. Because IFRS 16.53 does not name the gain, a challenge has to be built on IFRS 16.51 and IFRS 16.59 and on IAS 1.97, which is a harder conversation and is therefore had less often than it should be. The practical test is to take the modification gain recognised in the period, compare it with the entity's own materiality, and ask where a reader would find it. If the answer is nowhere, IFRS 16.51 has not been met however complete the IFRS 16.53 table is.

11. How do lease modifications differ between IFRS 16 and ASC 842?

Local FAQs

Does IFRS 16 have the ASC 842 rule about the right-of-use asset falling below zero on a modification? ASC 842-10-25-12 says the excess goes to profit or loss once the right-of-use asset is reduced to zero. IFRS 16 states that rule in IFRS 16.39, which sits in the reassessment paragraphs, and does not repeat it in IFRS 16.46(b). The outcome should be the same, because an asset cannot be negative, but the IFRS reasoning has to be constructed rather than cited, and a file taking that position should say so explicitly.

What about FRS 102? The FRC's periodic review moved UK GAAP to an on-balance-sheet lessee model in a revised Section 20, effective for periods beginning on or after 1 January 2026, with early application permitted if the other periodic review amendments are applied at the same time. A UK entity reporting for the calendar year 2026 is applying it now. The architecture is the same as IFRS 16: a modification is a separate lease where it adds the right to use one or more underlying assets and the change in price is commensurate with the stand-alone price, and otherwise the lease liability is remeasured with the adjustment made to the right-of-use asset. A change in the lease term or in the assessment of a purchase option uses a revised rate; a change in the amounts expected under a residual value guarantee uses an unchanged rate. Two differences matter. FRS 102 allows an obtainable borrowing rate as well as an incremental borrowing rate, which IFRS 16 does not, and EY's analysis of the periodic review notes that FRS 102 permits an unchanged discount rate in some modification circumstances where IFRS 16.45(c) requires a revised one. A group running both frameworks should expect different liabilities on the same amendment.

Which framework produces the larger gain on a scope decrease? Neither, systematically. On a contemporaneous partial termination the mechanics are the same and the difference comes only from the basis chosen for the right-of-use asset reduction, which ASC 842 lets a company elect. Where the two genuinely part is the future-dated termination, where IFRS 16 produces a gain and ASC 842 on EY's reading produces none.

Potential risks

Groups reporting under both frameworks, or under one framework with a US parent reporting under the other, are exposed here in a way that is easy to miss because the two standards look so similar. The separate contract test agreeing on almost every fact pattern creates a false confidence that the rest agrees too. The specific items to reconcile are the classification reassessment, the basis elected for right-of-use asset reductions, and the treatment of amendments that take effect after the date they are agreed. All three are policy-level differences, so they should be documented once at group level rather than resolved lease by lease.