What happens when an IFRS 16 lease agreement changes?

When an IFRS 16 lease is modified, for example through an extension, reduction, or indexation a new calculation of the asset and liability is required. Together with IFRS 16 expert Richard Nilsson, we explain how lease remeasurement works, step by step.

When a lease is modified

A lease needs to be changed or remeasured when something occurs that was not included in the original calculations. This could, for example, involve an extension, reduction, or indexation of the agreement from a specific date onward.

What happens is that the lease must be recalculated from a certain date

A new calculation is made in the same way as for the previous version of the lease. All payments from the new date are discounted to present value, and all calculations are based on discounting with an interest rate. It’s the same type of calculation — but it results in a new value.

– At the same time, there is sometimes an opening balance to consider. In some cases, the modification needs to be made before the original lease term has expired, which requires a new assessment, says Richard Nilsson, IFRS 16 expert.

He continues:

– This means that we will have both an asset and a liability, where the previous version has been paid down up to the modification date. The liability that existed at the end of the old version, and the asset at that same point in time, are updated with the new values. The newly calculated value minus the opening balance of the liability at the time of remeasurement represents the revaluation of the lease.

For example, assume that an asset originally amounted to SEK 1,000,000 and the liability has been amortized down to SEK 150,000. If a remeasurement is then made to SEK 500,000, the revaluation is calculated as 500,000 minus the opening liability. This means the lease is revalued by increasing the liability by SEK 350,000. The acquisition value is increased by the same amount – i.e., the difference between the newly calculated value and the liability at the time of remeasurement. The revaluation amount is therefore added to both the asset and the liability.

–After that, the lease continues as before — it is depreciated, amortized, and managed further, but from the new remeasurement date, Richard explains.

In summary, this is how a lease is handled in cases of indexation, extension, or reduction that is, when the future needs to be reassessed based on new conditions or updated values.