IFRS16 by Lessor Lease: reasonably certain Lessee option to add additional space

All topics related to IFRS Standards.
Post Reply
Yifatmel
Posts: 1
Joined: 24 Jul 2022, 04:04

IFRS16 by Lessor Lease: reasonably certain Lessee option to add additional space

Post by Yifatmel »

How to measure a lease contract by a Lessor at commencement:
Where the lessee has an option to increase the leased space (option to increase the scope of the lease) at a relatively below-market additional lease payments (the option is probable of being execised)?


For example the market value is 1000$ per sq foot and the lessee’s option is to pay 600$ per sq foot for the additional space.
So the additional lease payments for the additional space are not “commensurate” to original space and are not to be accounted as a separate lease.
The question is if the expansion option is to be treated as either:

(A) an increase in the leased space AND an increase in the lease payments (like it is an integral part of the lease contract, not an option), (like IFRS15,B43)
(addition of 600$ per the expected additional sq footage to the lease payments), (i know this is to be accounted under IFRS 16 and not under IFRS 15) ; OR

(B) like a “customer’s material right”: allocate part of the contract consideration to the fair value of the option (Option’s contract price is zero the options is given for free. Options fair value is (1000-600) = 400$ times the optional square footage) and defer the revenue recognition relating to that consideration until it is exercised or expires?

What will the Lessor do if it was an Opersting lease, and if it was a Finance Lease?

Thank you.
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: IFRS16 by Lessor Lease: reasonably certain Lessee option to add additional space

Post by Leo »

I would say that the option is not recognised initially but when it occurs.

If it's a finance lease, the modification is an increase in scope, but with a lower rent which is not the standalone selling price. So I wouldn't treat it as a new lease contract but as an existing one which incorporates the new discounted rate, actualised to the day of the event. thus, adjust the existing lease receivables, the delta would be recognised in P&L as a selling price etc...

So the accounting entry would be :
Dt: finance lease receivable
Cr: carrying amount of the asset (tangible)
Cr: gain on sell of the asset (revenue)

If it's a operating lease, just increase the rent in revenue when it occurs
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS16 by Lessor Lease: reasonably certain Lessee option to add additional space

Post by Marek Muc »

When you look at lessor accounting requirements in IFRS 16, options for additional assets are not accounted for at initial recognition. So I would just do nothing with it until it's exercised, and then account for it under general requirements for lessors.

BTW, exercise of that option won't be a lease modification because there won't be any changes to the terms and conditions of the original lease.
Post Reply