Lease Modifications and Derecognition for CPA FAR
This module delves into the intricacies of lease modifications and derecognition, crucial topics for the CPA FAR exam. Understanding these concepts is vital for accurate financial reporting under ASC 842.
Lease Modifications: What They Are and How to Account for Them
A lease modification occurs when a lessee and lessor agree to change the terms of a lease. These changes can significantly impact the accounting treatment, requiring careful analysis to determine if it's treated as a separate lease or a modification of the existing one.
Accounting for Lease Modifications by Lessees
For lessees, modifications are generally accounted for by adjusting the ROU asset and lease liability. The specific approach depends on whether the modification is treated as a separate lease or a modification of the existing one.
| Modification Type | Lessee Accounting Treatment |
|---|---|
| Grants right to additional asset | Accounted for as a separate lease. The original lease continues, and a new lease is recognized for the additional asset. |
| Does NOT grant right to additional asset | Modification of the existing lease. The ROU asset and lease liability are remeasured as of the modification date. Any difference between the remeasured lease liability and the carrying amount of the ROU asset is recognized in profit or loss. |
Key takeaway for lessees: If a modification adds a new asset, it's a new lease. Otherwise, it's an adjustment to the existing lease, impacting the ROU asset and lease liability.
Accounting for Lease Modifications by Lessors
Lessors also have specific guidance for lease modifications, which can differ based on whether the lease is classified as an operating lease, sales-type lease, or direct financing lease.
Lease Derecognition: When and How
Lease derecognition refers to the removal of a lease from the balance sheet. This typically occurs when a lease is terminated, expires, or is sold.
Visualizing the flow of a lease modification for a lessee. Imagine a lease contract as a flowing river. A modification can be like a tributary joining the main river (adding a new asset, thus a new lease) or a change in the river's course or speed (modifying the existing lease terms, impacting the ROU asset and lease liability). The key is to track the 'flow' of rights and obligations.
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Key Considerations for the CPA Exam
When tackling lease modification and derecognition questions on the CPA exam, remember to:
- Identify the nature of the modification: Does it grant a new asset right? Is it a change in consideration?
- Determine the accounting entity: Are you accounting as a lessee or a lessor?
- Apply the correct accounting treatment: Separate lease vs. modification, remeasurement, or derecognition.
- Calculate the impact on financial statements: ROU asset, lease liability, profit or loss.
When the modification grants the lessee the right to use one or more additional underlying assets not included in the original lease.
The ROU asset and lease liability are remeasured, and any difference is recognized in profit or loss.
Learning Resources
The official source for accounting standards on leases, including detailed guidance on modifications. Essential for understanding the authoritative rules.
A comprehensive article from PwC that breaks down lease modifications with practical examples and insights for implementation.
A video tutorial specifically designed for CPA candidates, explaining lease modifications and derecognition with a focus on exam-relevant concepts.
An article from the AICPA that provides a concise overview of lease modifications under ASC 842, tailored for accounting professionals.
Grant Thornton's explanation of lease modifications, offering clarity on the accounting implications and potential challenges.
An EY publication detailing the process and accounting treatment for lease derecognition under the new lease accounting standard.
Deloitte's insights into lease modifications and derecognition, providing practical guidance and considerations for businesses.
A PDF document from KPMG offering a detailed look at lease modifications under ASC 842, including scenarios and accounting treatments.
Another valuable YouTube resource for CPA candidates, focusing on the practical application of lease modification and derecognition rules.
While IFRS focused, this paper from the IASB provides excellent conceptual clarity on lease modifications that is transferable and beneficial for understanding ASC 842 principles.