The company has decided to exercise the extension option under its original lease agreement. Explain the accounting treatment for this transaction…

In the given case, the company has decided to exercise the extension option relating to the original 6,000 sq. ft. lease. Avigo thus concludes at the end of year 5 that it is reasonably certain that it will exercise the extension option. Thus, the lease liability and right of use (ROU) asset for the original lease will be modified while the lease for the additional floor will be treated as separate lease in accordance with para 44 Ind AS 116. The lease liability and ROU asset for the original lease will be modified: Under Ind AS 116, at commencement date, lessee recognises lease liability at present value of lease payments and Right-of-Use (RoU) Asset. Cost of RoU Asset includes 1. Initial measurement of lease liability, 2. Lease payments made at or before commencement, and 3. Initial direct costs. When there is a change in assessment of extension option, lease liability is remeasured using revised discount rate and corresponding adjustment is made to RoU Asset. Further, additional space taken on lease is treated as a separate lease if it increases scope and consideration is at stand-alone price. Calculation of lease liability at commencement date i.e. 1st April 2021 Since lease rentals are payable in advance, payments occur from Year 0 to Year 9. Annuity of PV factor @ 11% = 1 + 0.9009 + 0.8116 + 0.7312 + 0.6587 + 0.5935 + 0.5346 + 0.4817 + 0.4339 + 0.3909 = 6.5370 Lease liability = 6,00,000 x 6.5370 = 39,22,200 However, since lease payment is done in advance, the lease liability to be recognised would be - 39,22,200 -6,00,000 = 33,22,200 Measurement of RoU asset Particulars Amount (₹) Lease Liability 39,22,200 Add: Initial Direct Cost 3,00,000 Cost of RoU Asset 42,22,200 Computation of depreciation of RoU asset till 31st March 2026 Initially lease term considered = 10 years. Annual depreciation = 42,22,200 / 10 = 4,22,220 Depreciation for 5 years = 4,22,220 x 5 = 21,11,100 Carrying amount of RoU Asset on 31st March 2026 = 42,22,200 - 21,11,100 = 21,11,100 Computation of lease liability at the end of 5th year Date Initial Value Lease payments (at the beginning of the year) Interest exp @11% Closing Balance Initial Balance Depreciation Closing Balance 1.4.2021 39,22,200 6,00,000 3,65,442 36,87,642 42,22,200 4,22,220 37,99,980 1.4.2022 36,87,642 6,00,000 3,39,641 34,27,283 37,99,980 4,22,220 33,77,760 1.4.2023 34,27,283 6,00,000 3,11,001 31,38,284 33,77,760 4,22,220 29,55,540 1.4.2024 31,38,284 6,00,000 2,79,211 28,17,495 29,55,540 4,22,220 25,33,320 1.4.2025 28,17,495 6,00,000 2,43,924 24,61,419 25,33,320 4,22,220 21,11,100 1.4.2026 24,61,419 6,00,000 18,61,419 21,11,100 Reassessment of extension option on 31st March 2026 As per Ind AS 116 'Leases', lease liability will be remeasured using revised discount rate of 12% by making corresponding adjustment to RoU Asset. Calculation of PV of revised lease payments using original discount rate of 12% p.a. Year Lease payments PV @ 12% PV of lease payments 1-4 6,00,000 3.0374 18,22,440 5-10 8,00,000 2.2909 18,32,720 Total 36,55,160 Before the changes in lease term, the lease liability using the original discount rate of 11% p.a. comes to 18,61,419. The company's RoU asset at that date is 21,11,100. Lease liability is remeasured, including four payments of 6,00,000 and five payments of 8,00,000, discounted at 12% p.a. The present value is 36,55,160. The company increase the lease liability by - 17,93,741 (₹ 36,55,160 - 18,61,419). Due to remeasurement, the carrying amount of the company's RoU asset is 39,04,841 (₹ 21,11,100 +17,93,741). On 31st March 2027, the company will calculate the interest expense for the lease liability at the changed interest rate of 12% p.a. Journal Entry to be passed to recognise lease modification as on 1st April 2026: Particulars Dr. (₹) Cr. (₹) Right-of-Use Asset A/c Dr. 17,93,741 To Lease Liability A/c 17,93,741 (Being remeasurement of lease liability on reassessment of extension option) Revised carrying amount of RoU asset Particulars Amount (₹) Existing carrying amount 21,11,100 Add: Remeasurement adjustment 17,93,741 Revised carrying amount 39,04,841 Annual depreciation from 6th year onwards = 39,04,841 / 10 = 3,90,484