Reducing leased space: record the termination before remeasuring the lease
Surrendering part of leased premises can remove both a share of the right-of-use asset and a share of the lease liability, creating a termination gain or loss. The remaining liability then needs remeasurement using the modified payments and revised rate. Combining those steps can put the wrong amount into the asset or profit.
Confirm that the agreement changes the original lease
IFRS 16 defines a lease modification as a change in scope or consideration outside the original terms. Its effective date is when both parties agree to it. A later invoice or payment date does not automatically determine when the modification is accounted for.
Under paragraph 44, a modification is a separate lease only when it adds rights to use underlying assets and the consideration is commensurate with their standalone price, adjusted for the circumstances. Surrendering space is a decrease in scope and cannot meet that additional-rights condition.
This guide uses UK-adopted full IFRS lessee accounting for a 2026 annual period, without early adoption of IFRS 18. It assumes the right-of-use cost model. It does not apply public-sector revaluation or Treasury rate policies to the calculation.
Distinguish a new agreement from a change already provided for by the original lease. Index reviews and reassessments of existing options follow their specified rules. A lower payment alone also does not prove a scope reduction: a rent concession may leave all the original use rights intact.
Remove the surrendered rights and related liability
All figures are hypothetical pounds. On 1 January 2026 both parties agree to an immediate surrender of 25% of equally valuable usable office space. The original lease did not permit that reduction. Assume the area percentage faithfully measures the rights removed.
Immediately before modification, the net right-of-use asset is £120,000 and the lease liability is £130,000. There is no termination fee, impairment, prepaid or accrued rent, non-lease component, restoration adjustment or option issue. Ignore tax entries; this does not establish that real tax effects would be nil.
Remove 25% of each carrying amount. The asset reduction is £30,000 and the liability reduction is £32,500. Record Dr lease liability £32,500; Cr right-of-use asset £30,000; Cr termination gain £2,500. No cash payment occurs in that entry.
The balances after partial termination are therefore a £90,000 asset and a £97,500 liability. The gain reflects the different carrying amounts removed. Paragraph 46 requires the gain or loss associated with the partial termination to be recognised.
| Partial termination | Calculation | Amount removed |
|---|---|---|
| Right-of-use asset | £120,000 × 25% | £30,000 |
| Lease liability | £130,000 × 25% | £32,500 |
| Termination gain | £32,500 − £30,000 | £2,500 |
Sources and context, checked :
Remeasure the remaining payments at the revised rate
After modification, three £40,000 payments remain, each due at year end. The implicit rate cannot readily be determined. Assume a supported modification-date incremental borrowing rate of 6%. The present value is £40,000 / 1.06 + £40,000 / 1.06² + £40,000 / 1.06³ = £106,920.48.
Compare that amount with the £97,500 liability remaining after termination. The required increase is £9,420.48. Record Dr right-of-use asset £9,420.48; Cr lease liability £9,420.48. The post-modification asset is £99,420.48 and the liability is £106,920.48. The £2,500 termination gain remains in profit.
The liability reconciles as £130,000 − £32,500 + £9,420.48 = £106,920.48. The asset reconciles as £120,000 − £30,000 + £9,420.48 = £99,420.48. Do not post the whole net £23,079.52 liability reduction against either the asset or profit.
For the following year, 6% interest is £6,415.23. After the £40,000 payment, the liability is £73,335.71. Assuming straight-line use over exactly three remaining years, nil residual and no ownership transfer, annual depreciation is £33,140.16, leaving the asset at £66,280.32 after year one.
Sources and context, checked :
Keep the two-step bridge with the amendment
Retain the original contract, signed amendment, agreement date and evidence measuring the rights surrendered. Keep the before-change carrying amounts, revised payment list and rate support beside the termination and remeasurement entries.
The 25% allocation works here because the space is assumed equally valuable and area faithfully measures scope. Non-uniform space needs a supported allocation. A percentage reduction in floor area is not automatically the right measurement in every property.
Update both future interest and depreciation schedules after the modification. A reviewer should be able to trace the surrendered rights to the gain or loss, then trace the revised remaining payments to the new liability and asset adjustment.