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IFRS 16 lease modification question for scope reduction

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › IFRS 16 lease modification question for scope reduction

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  • August 7, 2025 at 9:23 pm #718668
    Lichade
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    Please can anyone help me with this question for IFRS 16 lease modification accounting from the lessee perspective? (question is at the end)

    Scenario 1, known accounting treatment: Under IFRS 16, a lessee has a lease for 5,000 sqm of office space, and the lease is set to end on 31 December 2025 with no renewal rights. In September 2025, the lessee enters into a new lease for the same 5,000 sqm with the landlord, running from 1 January 2026 to 31 December 2030. Although this is legally a new lease starting in 2026, from an accounting perspective (economic substance) it is treated as a term extension of the same underlying asset, as a lease modification. Therefore, the right-of-use (ROU) asset and lease liability should be updated in September 2025 (=effective date of lease mod) to reflect the extension through to 2030, rather than waiting until January 2026 to make the update.

    Adjusted Scenario 1, question on accounting treatment: lessee concludes the new lease in September 2025, the new lease means that the lessee will cut 1,000 sqm from the current 5,000 sqm it leases (=scope reduction). The start date legally for the new lease is still 1 January 2026, ending 31 December 2030, no other difference in T&C.
    Is this adjusted scenario also accounted for as a ‘lease modification’ like the original scenario whereby the ROU asset and lease liability should be updated in Sep 2025 (=effective date of lease modification) rather than in Jan 2026?

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