Key Points
- A modification that grants an additional right of use at a stand-alone price proportionate to the original lease is accounted for as a separate lease.
- Modifications that do not qualify as separate leases require the lessee to remeasure the lease liability using a revised discount rate at the effective date of the modification.
- IFRS 16.45 treats a decrease in scope as a partial disposal, recognising a proportional gain or loss in profit or loss.
- Misclassifying a modification can misstate both the right-of-use asset and lease liability by hundreds of thousands of euros on a single contract.
What is Lease Modification?
IFRS 16.44 defines a lease modification as a change in scope or consideration not part of the original terms. Common triggers include renegotiating the lease area, extending or shortening the lease term, and changing the periodic payment amount. The first decision is binary: does the modification add the right to use one or more underlying assets, and is the increase in consideration commensurate with the stand-alone price for that additional right of use? If both conditions hold, IFRS 16.44(a) requires the lessee to account for the modification as a separate lease. The original lease continues unaffected.
When the modification does not qualify as a separate lease, the lessee remeasures the lease liability at the effective date using a revised discount rate (IFRS 16.45). A decrease in scope (surrendering part of the leased space, for instance) requires the lessee to reduce the right-of-use asset proportionally and recognise any difference between the liability reduction and the asset reduction in profit or loss. An increase in scope or a change in consideration without a scope change adjusts the right-of-use asset by the same amount as the liability remeasurement, with no gain or loss. ISA 540.13(a) requires the auditor to evaluate whether the entity selected the correct accounting path before testing the remeasured figures.
Worked example: Henriksen Shipping A/S
Client: Danish maritime logistics company, FY2025, revenue EUR 140M, IFRS reporter. Henriksen leases 6,200 m² of warehouse space at Copenhagen port under a ten-year lease commencing 1 January 2021. The original annual payment is EUR 480,000 (payable in arrears), the incremental borrowing rate at commencement was 3.8%, and the initial lease liability was EUR 3,856,410. By 31 December 2025, five years of the lease term remain, the right-of-use asset carrying amount is EUR 1,928,205 (straight-line depreciation over ten years), and the lease liability balance is EUR 2,114,890.
Step 1 — Identify the modification
On 1 January 2026, Henriksen and the landlord agree to reduce the leased area from 6,200 m² to 4,650 m² (a 25% reduction in floor space) for the remaining five years. The revised annual payment is EUR 390,000. Henriksen's incremental borrowing rate at the modification date is 4.5%.
Step 2 — Classify the modification
The modification decreases the scope of the lease (floor area reduced by 25%). It does not add any right of use. This is not a separate lease. IFRS 16.46(a) applies: partial termination.
Step 3 — Remeasure the lease liability
The revised liability equals the present value of five annual payments of EUR 390,000 discounted at 4.5%. This produces a remeasured lease liability of EUR 1,713,189.
Step 4 — Adjust the right-of-use asset for the decrease in scope
The proportional decrease in scope is 25% (1,550 m² surrendered out of 6,200 m²). Reduce the right-of-use asset by 25%: EUR 1,928,205 multiplied by 25% = EUR 482,051. The corresponding 25% reduction in the pre-modification lease liability is EUR 2,114,890 multiplied by 25% = EUR 528,723. The difference of EUR 46,672 (EUR 528,723 minus EUR 482,051) is a gain recognised in profit or loss under IFRS 16.46(a).
Conclusion: the partial surrender produces a gain of EUR 46,672 and a remeasured right-of-use asset of EUR 1,573,175, supported by a floor-plan comparison, an updated discount rate from an external bank quote, and a clear split between the scope-decrease and price-change components.
Why it matters in practice
- Teams frequently remeasure the lease liability for a scope decrease without recognising the proportional gain or loss in profit or loss. IFRS 16.46(a) explicitly requires the lessee to decrease the right-of-use asset to reflect the partial termination and recognise the difference. Skipping this step overstates the right-of-use asset and buries what should be a P&L item inside the balance sheet.
- The revised discount rate is often overlooked. IFRS 16.45 requires the lessee to discount the revised lease payments using a revised rate at the effective date of the modification. Practitioners who reuse the original commencement-date rate understate or overstate the remeasured liability, depending on interest rate movements since commencement. ISA 540.13(b) requires the auditor to evaluate whether the data inputs (including the discount rate) are appropriate for the method used.
Lease modification vs. lease reassessment
| Dimension | Lease modification (IFRS 16.44–46) | Lease reassessment (IFRS 16.20–21, 36–40) |
|---|---|---|
| Trigger | Agreement between lessee and lessor to change scope or consideration | Significant event or change in circumstances within the lessee's control affecting the assessment of extension, termination, or purchase options |
| Discount rate | Revised at the effective date of the modification per IFRS 16.45 | Revised only when the reassessment changes the lease term or exercise of a purchase option (IFRS 16.40) |
| Gain or loss | Possible on a decrease in scope under IFRS 16.46(a) | No gain or loss; adjustment flows through the right-of-use asset |
| Frequency on engagements | Triggered by a negotiated contract change; typically documented once per event | Triggered by changed facts (new anchor tenant, business restructuring); may recur at each reporting date if circumstances keep changing |
| Common audit gap | Failure to use a revised discount rate or to recognise the partial-termination gain | Failure to reassess extension options when the lessee's economic incentives have changed materially |
The practical distinction matters because a modification requires both parties to agree while a reassessment is a unilateral accounting judgment by the lessee. Auditors who conflate the two may apply the wrong discount rate rule or miss a required P&L entry.
Related terms
Frequently asked questions
Do I need a new discount rate for every lease modification?
Yes, unless the modification is accounted for as a separate lease. IFRS 16.45 requires the lessee to determine the revised lease payments and discount them using a revised rate at the effective date of the modification. The only exception is a modification treated as a separate lease under IFRS 16.44(a), which uses its own rate at the commencement date of that separate lease.
What if a rent concession does not change the scope of the lease?
If the concession only reduces payments without changing the leased area or term, the lessee remeasures the lease liability with the revised payments and a revised discount rate, and adjusts the right-of-use asset by the same amount under IFRS 16.46(b). No gain or loss arises. The IASB's 2020 amendment (IFRS 16.46A–46B) offered a practical expedient for COVID-19-related rent concessions, but that expedient expired for reductions affecting payments due after 30 June 2022.
How does a lease modification differ from a contract modification under IFRS 15?
A lease modification under IFRS 16.44 changes the scope or consideration of a lease between lessee and lessor. A contract modification under IFRS 15.18 changes the scope or price of a revenue contract with a customer. The decision trees differ: IFRS 16 asks whether an additional right of use is priced at stand-alone rates, while IFRS 15 asks whether additional goods or services are distinct and priced at stand-alone selling prices. Both require a fresh assessment at the modification date.