For example, the accounting for the same lease and the same modification to that lease can differ if the lease is classified as an operating lease under US GAAP before and/or after the modification. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

• As a result, the remaining ROU asset is $162,156 (a decrease of $108,105), and the remaining lease liability is $173,591 (a decrease of $115,728).
• 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.
• As noted below, initial direct costs are added to the initial net investment in the lease and the definition of implicit interest rate takes this into account (IFRS 16.69).
• The lessor decreases the net investment in the lease for received payments.
• The LeaseQuery system utilizes the approach based on the proportionate adjustment to the lease liability, since a lessee would have this information readily available after calculating the modified liability.

Adhering to the disclosure requirements of ASC 842 ensures both transparency and compliance. Accounting for partial lease terminations involves adjusting the lease liability and the right-of-use (ROU) asset. The lease liability should be allocated between the terminated and non-terminated portions of the lease based on the relative fair value or by using the allocation based on the remaining lease payments. The ROU asset should also be adjusted accordingly to reflect the changes in the lease liability.

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This percentage is then applied to the pre-modification right of use asset. Finally, the difference between the post-modification lease liability and the right of use asset post-modification is taken to the income statement. Like many aspects of lease accounting on face value, the accounting appears straightforward. When a lease has been terminated in its entirety, the lessee should no longer recognize a right of use asset and a lease liability.

Lease Concessions – Per SFFAS 54, are rent discounts made by the lessor to entice the lessee to sign a lease. Lease concessions include rent holidays/free rent periods, or reduced rents. During 2025 XYZ Shipping encountered rough financial times and had to downsize their headcount drastically.

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VA will utilize the BOC codes listed in table 1 or 2 below for obligation charges related to buildings, facilities, other structures, or equipment leases. Purchase Option – A provision allowing the Government to purchase leased property. Expense – Outflows or use of assets and/or incurrence of liabilities (or a combination of both), for which the benefits do not extend beyond the present accounting period.

The standard is new for FY24 so the Financial Statement Auditors are not yet familiar with VA’s centralized implementation process. Standstill Agreement – Temporary measure used when the procurement for an expiring lease cannot be completed before the end of its term. The lessor will maintain Government tenancy and VA will continue making rent payments until a new or succeeding lease is executed.

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Lease modifications are common and accounting for them can be complicated. In this article, we outline the lease modification guidance in IFRS 16, compare it to US GAAP, and describe the lessee accounting for lease termination lessor and lessor accounting for common types of lease modifications. The approaches discussed below are applicable for accounting for a full lease termination under ASC 842, IFRS 16, and GASB 87.

The standstill agreement does not imply a new lease, extension, or succeeding lease will be offered to the incumbent lessor. Short-Term Lease – Per SFFAS 54, is a non-intragovernmental lease with a lease term of 24 months or less. If the lease agreement contains an option to renew that can be exercised without additional legislation, it will be presumed that the option will be exercised, thus included in the consideration of the lease term. Improvements may also be referred to as build out costs or tenant improvements.