Lease Modifications vs. Reassessments – Key Differences in Scope and Accounting Treatment

While often confused, lease modifications and lease reassessments are conceptually and operationally distinct under U.S. GAAP (ASC 842) and IFRS (IFRS 16). Both require adjustments to lease accounting, but they are triggered by different events and follow different rules for measurement, classification, and disclosure.

This article defines both processes, explains their differences, and provides a side-by-side comparison of their accounting impacts on lessees and lessors.

1. Definitions

Lease Reassessment

✦ A mandatory re-evaluation of certain lease assumptions, such as the lease term, renewal or termination options, or purchase options

✦ Triggered by a change in facts or circumstances, not renegotiation

Lease Modification

✦ A mutual change to the lease contract terms agreed by both parties

✦ May involve scope, consideration, duration, or pricing terms

✦ Could create a separate lease if criteria are met

2. Triggering Events

Aspect	Lease Reassessment	Lease Modification
Initiation	Triggered by change in lessee judgment	Triggered by contract renegotiation
Common triggers	Exercise of renewal or purchase options	Change in scope (add/remove leased asset), rent
Mutual agreement?	Not required	Required
Change to contract?	No	Yes – legal terms are altered

3. Lessee Accounting Differences

Area	Reassessment	Modification
Lease liability	Recalculated using new discount rate	Adjusted using modified terms and rate
ROU asset	Adjusted to match liability	Adjusted unless scope reduced → gain/loss possible
Separate lease?	Not applicable	May result in separate lease if criteria met
Reclassification	Possible (e.g., change from operating)	Possible, depending on modification nature

4. Lessor Accounting Differences

Reassessment:

✦ Generally not required unless due to a lease modification

✦ Operating leases are not remeasured unless reclassified

✦ Finance leases remain unchanged unless renegotiated

Modification:

✦ May result in a reclassification

✦ Adjust lease receivable or asset depending on the lease type

✦ For operating leases, adjust future lease income; for finance leases, recalculate net investment

5. Practical Examples

Reassessment Example – Lessee:

✦ Year 3: Lessee decides to exercise a previously uncertain 3-year renewal

✦ Lease term extends → remeasure lease liability using updated discount rate Dr. ROU Asset – $100,000 / Cr. Lease Liability – $100,000.

Modification Example – Lessee:

✦ Lease renegotiated to add a second warehouse

✦ Scope increases, and consideration increases proportionally

✦ This is a separate lease Dr. ROU Asset – $250,000 / Cr. Lease Liability – $250,000.

6. Disclosure Requirements

Entities should disclose the nature and impact of both events:

✦ Explain material lease modifications or reassessments

✦ Quantify the effect on lease liabilities and ROU assets

✦ Disclose judgments about scope and separate lease treatment

Disclosure example: “During the year, the Company modified two warehouse leases to extend lease terms and add new space. This resulted in one lease reassessment ($1.4 million increase in lease liability) and one separate lease ($950,000 ROU asset recognized).”