A lease modification under Ind AS 116 is first a classification question, not a recalculation question: if the modification increases the scope by adding the right to use one or more underlying assets, and the consideration increases by an amount commensurate with the stand-alone price for that added scope, it is accounted for as a separate new lease — only when it isn't a separate lease does the lessee remeasure the existing lease liability, using a revised discount rate, against the asset's remaining right-of-use carrying amount. The audit's first task is confirming which route management applied, since a modification wrongly treated as remeasurement when it should be a separate lease (or vice versa) changes both the liability and the asset.
Testing the remeasurement, where it applies
- 01Recompute the revised lease liability independentlyThe liability should be remeasured as the present value of the revised lease payments, using a revised discount rate determined at the effective date of the modification — recompute this rather than accept the client's spreadsheet output, since an incorrect discount rate compounds across the remaining lease term.
- 02Test which events trigger remeasurement without a separate-lease conclusionA change in the lease term, a change in the assessment of a purchase option, a change in future lease payments from an index or rate, or a change in the extent of an option without a corresponding scope increase all drive remeasurement — check each type of change is being captured, not only an explicit contract amendment.
- 03For a partial termination, test the proportionate reductionWhere a lease is partially terminated (surrendering part of the leased space, for instance), the right-of-use asset and liability should be reduced proportionately to reflect the partial or full termination, with any difference between the proportionate reductions taken to profit or loss — recompute the proportion used.
- 04Confirm the right-of-use asset absorbs the liability adjustment, not profit or lossFor a modification that is not accounted as a separate lease and is not a decrease in scope, the corresponding adjustment should be made to the right-of-use asset itself, not recognised directly in profit or loss.
- 05Check the discount rate used at remeasurement is current, not the original rate carried forwardUnless the rate implicit in the lease is readily determinable, the lessee's incremental borrowing rate as at the effective date of the modification should be used — a rate environment change since lease inception should be reflected.
Treating every rent escalation or short extension negotiated mid-lease as a routine administrative update, without running it through the separate-lease test and a liability remeasurement, understates both the lease liability and the right-of-use asset for the remaining term — this is one of the more easily missed Ind AS 116 errors precisely because the change often looks minor.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexLease accounting audit under Ind AS 116: what changedHow the right-of-use asset and lease liability are recognised, testing the discount rate and lease term, the exemptions that still exist, and the errors that recur most often.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
- Audit data & extractsTrial balance mapping for audit softwareMapping a client's idiosyncratic ledgers to a standard chart of accounts is the step that decides whether analytics and disclosures work at all, and the one most firms rush.
- Fixed assets & capexCapex vs revenue expenditure: the audit testThe capitalisation criteria, the repairs-versus-improvement judgement calls that actually come up, and how to sample repairs and maintenance for misclassified capex.
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