The lessee’s right to use an asset may change during the lease
A local government may be either a lessee or lessor to another organization. At some point in the future, either party may be able to alter the lease. The potential to alter the lease will depend on the terms of the agreement when the lease was first created.
Any alteration to the lease could result in a lease modification. Or it may be considered a partial or full termination, depending on the circumstances.
Lease Termination
When the lease alteration impacts the lessee's right to use the underlying asset, it’s classified as a lease termination.
When a partial or full termination occurs:
- The lessee should decrease the carrying values of the lease liability and the related asset and recognize a gain or loss for the difference.
- The lessor should decrease the lease receivable and related deferred inflow of resources and recognize a gain or loss for the difference.
Example:
Partial termination: A city leased a piece of land to an organization for ten years at a rate of $10,000 per year. At the end of year five, the lease is partially terminated. The lessee loses access to half of the land, but their payment is also reduced to $4,000 per year.
Full termination: A city leased a piece of land to an organization for ten years at a rate of $10,000 per year. At the end of year five, the lease is fully terminated.
What’s important here?
Lease modifications and partial or full terminations are treated differently under GASB 87.
The critical distinction between them is whether the lessee’s right to use the underlying asset has decreased or not.
