Lease modifications and rescheduling from the lessor's side

Leasing companies regularly change contracts: extending terms, adding vehicles to a fleet agreement, reducing rents, granting payment holidays or rescheduling instalments for a lessee in difficulty. IFRS 16 routes these changes differently depending on the type of lease and the type of change. A finance lease modification is either a separate new lease, a reclassification to an operating lease, or an IFRS 9 modification with an immediate gain or loss; an operating lease modification is a new lease accounted for prospectively. Rescheduling for distressed lessees is the most sensitive case, because an IFRS 9 modification loss must be recognised immediately at the original implicit rate, and the change is also evidence for staging and credit-impairment. Treating every change as a 'new schedule' with a new rate hides losses.

Was the change a lease modification (a change in scope or consideration not part of the original terms), or the exercise of an option or a change in an index already in the contract? Does the modification add the right to use one or more additional assets at a price commensurate with their stand-alone price, so that it is a separate lease? For a finance lease, would the lease have been an operating lease had the modification been in effect at inception? For distressed rescheduling of a finance lease, is the gross carrying amount recalculated at the original implicit rate with a modification gain or loss recognised immediately? Is the lessee's distress reflected in the staging and credit-impairment assessment? For operating leases, are accrued and prepaid rents carried into the new lease and spread over the remaining term? Where rents already due are waived, is the waiver treated under IFRS 9 rather than spread?

1. Confirm that a modification exists: a change in scope or consideration that was not part of the original terms.
2. For both lease types, account for the modification as a separate lease if it increases scope by adding the right to use one or more underlying assets and the consideration increases by an amount commensurate with the stand-alone price, as adjusted for the circumstances.
3. Finance lease, not a separate lease: if the lease would have been classified as operating had the modification been in effect at inception, account for it as a new operating lease from the effective date, recognising the underlying asset at the carrying amount of the net investment immediately before the effective date.
4. Finance lease, otherwise: apply IFRS 9; for a non-derecognising modification (the typical rescheduling), recalculate the gross carrying amount as the present value of the modified cash flows at the original implicit rate and recognise a modification gain or loss in profit or loss; assess whether the change is so substantial that derecognition and a new asset are appropriate.
5. Reassess ECL: forbearance granted because of financial difficulty is an indicator of a significant increase in credit risk and may indicate credit-impairment; a modified lease returns to 12-month ECL only on evidence of improved credit risk.
6. Operating lease: account for the modification as a new lease from the effective date, treating prepaid or accrued lease payments as part of the payments for the new lease and recognising the revised total on a straight-line basis over the remaining term.
7. Where an operating lessor forgives rents already due and recognised as a receivable, apply IFRS 9 impairment and derecognition to that receivable; only future rents fall within the IFRS 16 modification.

For an IFRS 9 modification of a finance lease receivable: modification gain or loss = present value of modified cash flows at the original implicit rate minus the gross carrying amount before modification; costs and fees incurred adjust the carrying amount and are amortised over the remaining term. The original implicit rate continues to drive finance income. For a finance lease that becomes an operating lease: the underlying asset is measured at the carrying amount of the net investment immediately before the effective date and then depreciated. For an operating lease modification: remaining lease payments under the modified contract plus or minus existing accruals or prepayments, recognised straight-line over the remaining term.

Disclose: (1) the accounting policy for lessor lease modifications, distinguishing separate leases, reclassifications and IFRS 9 modifications; (2) modification gains and losses recognised on finance lease receivables; (3) the amortised cost before modification and net modification gain or loss for lease receivables modified while carrying a lifetime allowance; (4) the gross carrying amount of modified receivables that moved back to 12-month ECL during the period; (5) the forbearance policy, how forborne leases are identified and how they are staged; (6) significant changes in the net investment caused by modifications.

• Recomputing a new implicit rate for a rescheduled finance lease so that no loss arises
• treating a payment holiday with no compensating interest as if it had no economic effect
• moving rescheduled leases to Stage 1 immediately because they are now current
• accounting for an operating lease rent reduction by reducing income only in the months affected instead of spreading the revised total
• spreading the forgiveness of rents already due over the remaining term instead of recognising it under IFRS 9
• reassessing lease classification for changes that are not modifications