Question

A lessee enters into a 5-year property lease with fixed annual rentals and variable payments linked to CPI, initially measured using the CPI at commencement. In Year 2, the CPI increases materially. In Year 3, the lease is amended to extend the term by 3 years and reduce the fixed rent from that date. The lessee uses the incremental borrowing rate (IB

Q: Answer-A lessee enters into a 5-year property lease with fixed annual rentals and variable payments linked...

Under Ind AS 116, when lease payments change due to an index e.g., CPI, the lease liability is remeasured with a corresponding adjustment to the ROU assetnot through profit or loss or OCI. In Year 3, the lease modification extension rent reduction does not result in a separate lease. Therefore, the lessee remeasures the lease liability using the new incremental borrowing rate IBR at the modification date, with a corresponding adjustment to the ROU asset.

R on modification dates. Which accounting treatment best reflects the correct sequence for lease liability and right-of-use (RO
U asset adjustments after: (i) the CPI change in Year 2, and (ii) the lease modification in Year 3, assuming no separate lease arises?

A (i) No remeasurement; (ii) Treat as separate lease and keep original liability intact

B (i) Remeasure liability for index change through P&L; (ii) Lease modification—remeasure using new IBR, adjust ROU

C (i) Adjust ROU via OCI; (ii) Modify using original discount rate, recognize gain/loss in P&L

D (i) Remeasure liability with offset to ROU; (ii) Modification using new IBR with ROU adjustment

E (i) Recognize variable payments only when incurred; (ii) No modification accounting as commercial terms are “substantially similar”

Practice Next

Detailed Solution

More Accounts Questions

Hey! Ask a query

Please Register/Login

RBI Grade B 2026 Phase 1 Memory Based Paper