Key Takeaways
- Remeasurement adjusts the lease liability for changes in estimates - not contract changes (which are modifications)
- The discount rate used depends on the remeasurement trigger - some use revised rates, others use the original rate
- Remeasurement adjustments typically affect the ROU asset with no immediate P&L impact, though future depreciation and interest will change
- If the ROU asset would go negative, the excess is recognised in profit or loss
- Common triggers include lease term reassessments, option changes, and index-linked payment changes
What is a Remeasurement?
A remeasurement occurs when the lease liability must be recalculated due to changes in estimates or circumstances - without a change to the actual lease contract. This differs from a modification, which involves contractual changes.
Remeasurements reflect the evolving reality of a lease arrangement, such as:
- Changing your assessment of whether you'll exercise an option
- Index-linked rent increases taking effect
- Revised estimates under residual value guarantees
Modification
Change to the contract terms
Example: Negotiated lease extension
Remeasurement
Change in estimate or assessment
Example: Reassessing whether you'll exercise an existing option
Remeasurement Triggers
In practice, five common remeasurement triggers are encountered under IFRS 16. The discount rate used depends on the trigger.
| Trigger | Discount Rate | Reference |
|---|---|---|
| Change in lease term assessment | Revised rate | IFRS 16.40(a) |
| Change in purchase option assessment | Revised rate | IFRS 16.40(b) |
| Change in amounts under residual value guarantees | Original rate | IFRS 16.40(c) |
| Change in future payments due to index/rate | Original rate | IFRS 16.42(b) |
| Change in future payments due to floating interest rates | Revised rate | IFRS 16.43 |
Note that changes in payments tied to the use of the underlying asset (such as usage- or performance-based variable payments) are not remeasurement triggers. They are recognised in profit or loss in the period in which the event or condition that triggers them occurs (IFRS 16.38).
Lease Term Reassessment
The lease term must be reassessed when there is a significant event or change in circumstances that:
- Is within the lessee's control, and
- Affects whether the lessee is reasonably certain to exercise (or not exercise) an option
Examples Requiring Reassessment
- Significant leasehold improvements that extend the economic life of use
- Significant change in the business (e.g., decision to relocate headquarters)
- Changes making an option more or less likely to be exercised
Change in the Non-Cancellable Period
Separately from a reassessment of options, IFRS 16.21 requires the lease term to be revised if there is a change in the non-cancellable period itself. The standard gives the following examples:
- The lessee exercises an option that was not previously included in the lease term
- The lessee does not exercise an option that was previously included in the lease term
- An event occurs that contractually obliges the lessee to exercise an option not previously included in the lease term
- An event occurs that contractually prohibits the lessee from exercising an option previously included in the lease term
Worked Example
A company leased premises for 5 years with a 3-year extension option. Originally, they assessed the option would not be exercised (not reasonably certain). After investing £500,000 in leasehold improvements, they reassess and conclude the extension is now reasonably certain.
- Remaining lease term before reassessment: 3 years
- Revised lease term: 6 years (including extension)
- Revised discount rate at reassessment date: 5%
The £150,000 liability adjustment shown below is illustrative. The actual figure depends on the specific lease payments and the difference between the liability discounted at the original rate (over the original term) and the revised liability discounted at 5% over 6 years.
Accounting Treatment
- Recalculate the lease liability using revised payments over 6 years at the revised 5% rate
- Adjust the ROU asset by the same amount as the liability change
- No immediate P&L impact (unless the ROU asset would be reduced below zero). Future depreciation and interest will change prospectively
Index-Linked Payment Changes
When lease payments are linked to an index (e.g., CPI, RPI) and the index changes, the lease liability must be remeasured. Key points:
- The original discount rate is used
- The remeasurement occurs when the cash flows actually change (not when the index changes)
- Future index changes are not forecast
Timing of Remeasurement
Remeasure when the adjustment to lease payments takes effect - typically at the lease payment adjustment date specified in the contract, not when the index is published.
Worked Example
Scenario
A CPI-linked lease has payments that increase annually based on CPI. At the annual review:
- Current annual rent: £100,000 (paid annually in arrears)
- Remaining lease term: 4 years
- Original discount rate: 5%
- Lease liability before remeasurement: £354,595
- CPI increase: 3%
- New annual rent: £103,000
The liability is remeasured using the new payment of £103,000 for the remaining 4 years, discounted at the original 5% rate. The recalculated liability is £365,233, an increase of £10,638.
For more on variable payments, see our Variable Payments guide.
Residual Value Guarantee Changes
When the amounts expected to be payable under residual value guarantees change, the lease liability is remeasured using the original discount rate.
This typically occurs when:
- The estimated residual value of the asset changes
- Market conditions affect the expected shortfall
Scenario
A vehicle lease includes a residual value guarantee. Originally, no payment was expected. Due to market changes, the company now expects to pay £15,000 at lease end in 2 years. Discounting at the original rate gives a present value of £12,400.
When the ROU Asset Cannot Be Reduced Further
Remeasurement adjustments are normally recorded against the ROU asset. However, if a remeasurement would reduce the ROU asset below zero, the excess must be recognised in profit or loss.
Scenario
A lease is reassessed to have a shorter term. The lease liability decreases by £80,000, but the ROU asset carrying amount is only £60,000.
Remeasurement Summary
| Trigger | Rate | P&L Impact |
|---|---|---|
| Lease term reassessment | Revised | No (unless ROU < 0) |
| Purchase option reassessment | Revised | No (unless ROU < 0) |
| Residual value guarantee | Original | No (unless ROU < 0) |
| Index-linked payment change | Original | No (unless ROU < 0) |
| Floating rate change | Revised | No (unless ROU < 0) |
This article is provided for general informational purposes only and does not constitute accounting, legal or professional advice.