Lease Modification
A lease modification is a change to the terms and conditions of a lease that alters its scope or its consideration and was not part of the original contract terms.
Leasing
Explanation
Typical modifications are extensions, early terminations, added or removed assets, and rent changes. Under ASC 842 and IFRS 16, a modification is accounted for as a separate contract when it adds the right to use one or more additional underlying assets and the price increases by an amount commensurate with the standalone price for that added right of use. Otherwise, the existing lease is adjusted. Lessees remeasure the lease liability using a revised discount rate and adjust the right-of-use asset; a reduction in scope can trigger a gain or loss on partial termination. Lessors with an operating lease generally account for a modification as a new lease from its effective date. For lessors with sales-type or direct financing leases, the outcome depends on the classification of the modified lease.
Why It Matters
Modifications are frequent in equipment and real estate portfolios and require reassessment of classification, lease term, and discount rate. In SAP, lessee remeasurement runs in SAP CLM, while lessor modifications are handled as contract changes in SAP RAR.
Related Terms
Contract Modification · Lease Term · Lease Liability · Right-of-Use Asset · ASC 842
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