Stay tuned for future refinements in accounting standard setting as a result of these initiatives. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Understand the requirements of the new leasing standard, FASB ASC 842, and plan an efficient transition with Deloitte’s Lease Standard Implementation Workshop.

If you are contemplating a possible lease termination, please contact your tax and accounting expert to assist you in applying this guidance in your specific circumstances. In promulgating this guidance, FASB believed that a decision to not sublease the property is separate from the decision to cease using the property. The liability recorded at the cease-use date assumes that the property will be subleased. If the bank decides not to sublease the property, the forgone sublease income will be booked as an expense during the period(s) such decision continues to be in effect.

Remeasuring the lease liability

Now consider the same office building, but instead, the lessee decides to downsize and no longer needs any of the building space. The accounting for terminations and partial terminations is the most complex area when calculating the values of the lease liability and right of use asset. An alternative to these manual calculations using Cradle’s lease accounting software.

Wigwam LLC had entered into a ten-year lease agreement with Chopin Ltd to lease a specific machine to help with the manufacturing of guitars. However, at the start of year three, Wigwam no longer requires the machine and immediately terminates the lease due to a new way of manufacturing. As stipulated in the lease contract, a lease termination incurs a $500,000 termination fee and, in doing so, will remove the obligation of future lease payments and have the ability to return the leased machinery. IFRS 16 requires the use of the second approach when accounting for a partial termination.

8 Accounting for a lease termination – lessor

These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. For more information regarding modifications, please review the following articles. Generally, lease termination accounting payments made to terminate a lease as described above will be deductible for tax purpose when paid. The FASB continues to evaluate stakeholder feedback on the adoption of ASC 842.

Assume a private company, Company L, enters into an operating lease agreement commencing on January 1, 2020 – the date the company plans to early adopt the new lease accounting standard. The agreement states that Company L will lease five floors of a building for office space at $6,000,000 per year increasing by 3% over a period of 10 years. Company L has determined it will use its incremental borrowing rate on January 1, 2020, to value this arrangement.

Accounting for Lease Modifications under ASC 842, Part 2: Operating to Finance

The modified lease liability calculation will remain consistent in both of the approaches below. However, the value of the ROU asset will change based on the approach selected. A partial termination is when the lessee reduces its access to the right of use asset. For example, a lessee leases 3 floors in an office building and vacates one of the leased floors. Correspondingly it’s likely the lessee will have a reduction in lease payments.

IFRS 16 requires the calculation of a modified lease liability, and an adjustment to the asset value to reflect the partial termination with any variance recorded to gain or loss in the current period. LeaseGuru powered by LeaseQuery can provide these calculations needed for IFRS 16 compliance. Due to the partial termination, the company will now use its incremental borrowing rate on January 1, 2026, 6.75%, so the present value of the remaining lease payments is $18,211,776. This will result in a $8,878,204 ($27,089,980 – $18,211,776) decrease in the lease liability.