Lease Modification under IND AS 116 — Para 45 and 46 Explained

1. What is a Lease Modification?

A lease modification is a change in the scope or consideration of a lease that was not part of the original terms and conditions. It arises when a lessee and lessor agree to change the lease mid-term — for example, reducing the rent, extending the term, giving back part of the space, or taking additional floors.

Common real-life situations that trigger a modification:

• Landlord agrees to reduce rent due to COVID or market conditions
• Lessee extends the lease term by another 2 years
• Lessee gives back one floor out of three (scope reduction)
• Lessee takes an additional floor in the same building (scope increase)
• Payment frequency changes from monthly to quarterly

2. Decision Tree — Which Paragraph Applies?

IND AS 116 has three different accounting treatments for modifications. The key question is whether the modification increases the scope of the lease by adding the right to use additional assets.

3. Para 46b — Scope Increase (New Separate Lease)

When a lessee takes additional space at the standalone market price, the modification is treated as a brand new, separate lease. The existing lease continues unchanged.

Example: ABC Ltd leases Floor 3 at ₹1,00,000/month. After 12 months they also take Floor 4 at ₹1,05,000/month (current market rate). This is a new separate lease — calculate a fresh ROU asset and lease liability for Floor 4. Floor 3 accounting is not touched.

4. Para 45 — Change in Term or Rent (Remeasurement)

This is the most common modification. It applies when the same asset continues but the rent, remaining term, or IBR changes — without any change in scope.

Accounting steps on the modification effective date:

1. Calculate the revised lease liability — PV of revised future payments discounted at the revised IBR (or original IBR if only term changes)
2. The difference between the old carrying amount of the lease liability and the new revised liability is adjusted against the ROU asset
3. No gain or loss in P&L — the adjustment goes entirely to the ROU asset
4. Going forward, depreciate the revised ROU asset over the revised remaining term

5. Para 46a — Scope Reduction (Partial Termination)

This is the most complex modification. When a lessee gives back part of the leased asset (e.g., gives back one floor, returns 2 of 5 vehicles), the standard requires:

1. Derecognise the proportional lease liability — the portion relating to the surrendered scope
2. Derecognise the proportional ROU asset
3. Recognise the difference as a gain or loss in P&L
4. Then apply Para 45 remeasurement on the remaining portion

6. Worked Example: Para 45 — Rent Reduction

Calculation on 1 April 2025

Step 1 — Calculate revised lease liability:

Step 2 — Adjust ROU asset:

Revised ROU asset = ₹21,22,404 − ₹4,44,224 = ₹16,78,180

Journal Entry on 1 April 2025 (Modification Date)

7. Worked Example: Para 46a — Give Back One Floor

Calculation on 1 April 2025

Step 1 — Derecognise 50% of liability and ROU (surrendered scope):

Step 2 — Remeasure remaining liability (Para 45 on retained 50%):

Step 3 — Adjust ROU asset for remeasurement difference:

Revised ROU asset = ₹21,22,404 − ₹6,444 = ₹21,15,960

Journal Entries on 1 April 2025

8. Multiple Sequential Modifications

In practice, a lease may be modified more than once — for example, rent reduced in Year 2, then term extended in Year 3. Each modification is accounted for independently and sequentially:

• The output of Modification 1 (revised liability and ROU asset) becomes the input for Modification 2
• Each modification uses the IBR prevailing at that modification's effective date
• There is no limit on the number of modifications — each one applies the same decision tree

9. Disclosure Requirements

IND AS 116 Para 59 requires disclosure of modifications. Specifically:

• The nature and effect of significant modifications during the period
• Any gain or loss on partial termination (Para 46a) must be disclosed separately
• The movement in lease liability schedule (opening → modifications → interest → payments → closing) must reflect modification impacts
• The ROU asset rollforward must show additions/derecognitions from modifications

10. Common Questions

What if the modification is a COVID rent concession?

IND AS issued a practical expedient (similar to IFRS 16 Amendment) for COVID-19 rent concessions. If the rent reduction meets specific criteria (direct consequence of COVID, payment reduction only, no other substantive changes), lessees can account for it as a variable lease payment rather than a modification — simplifying the accounting significantly.

What IBR do I use for Para 45 modification?

Always use the revised IBR at the modification effective date — not the original IBR. This reflects the current borrowing cost for the revised remaining term. The only exception is a reassessment (not a modification) triggered by a term option change, where the standard allows using the original rate in some cases.

How do I determine the "proportion" for Para 46a?

The standard does not specify a single method. The most common approaches are: proportion of floor area surrendered, proportion of right-of-use asset value, or proportion of remaining lease payments relating to surrendered scope. Use the method that best reflects the substance of what was given back and apply it consistently.

Does a rent holiday count as a modification?

Yes, if the rent holiday was not in the original lease terms. A temporary zero-rent period agreed with the landlord mid-lease is a modification. Account for it under Para 45 — recalculate the PV of future payments (which now includes zero payments during the holiday period) and adjust the ROU asset.

Can a modification reduce the ROU asset below zero?

In a Para 45 modification, if the revised liability is higher than the old liability (e.g., term extended, rent increased), the adjustment increases the ROU asset — no issue. If the revised liability is much lower, the ROU asset decreases but cannot go below zero. Any excess reduction beyond zero is recognised as a gain in P&L.