What Triggers Remeasurement

A lease liability is not a “set it and forget it” number. ASC 842 requires the lessee to remeasure the liability, and correspondingly adjust the right-of-use asset, whenever certain triggering events occur after commencement. The most common triggers are:

• A change in the lease term (the lessee now is, or is no longer, reasonably certain to exercise an option to extend or terminate)
• A change in the assessment of whether the lessee is reasonably certain to exercise a purchase option
• A change in amounts probable of being owed under a residual value guarantee
• Resolution of a contingency that had made variable payments effectively fixed

Note what is not on this list: routine changes in an index or rate (such as a CPI-linked payment adjustment) do not trigger remeasurement on their own — those are handled through variable lease cost as incurred, unless remeasurement is already required for another reason, in which case the liability is updated using the current index or rate at that time.

Worked Example: Change in Lease Term

Return to the five-year equipment lease from Part 2 (payments of $50,000 per year, 6% discount rate). Assume the contract actually included a one-year renewal option that Lessee Corp originally concluded it was not reasonably certain to exercise, so the original liability reflected only five years of payments.

At the start of Year 3, a change in circumstances (the equipment cannot easily be replaced, and relocation costs would be prohibitive) makes Lessee Corp reasonably certain it will exercise the renewal. The liability must be remeasured to reflect the revised lease term — now four remaining original years plus the one renewal year.

This last point trips up preparers who expect an income statement impact from every remeasurement. In the ordinary case, remeasurement is balance-sheet-only: the liability changes, and the ROU asset absorbs the offsetting entry dollar for dollar.

Worked Example: Residual Value Guarantee Changes

Suppose a separate lease includes a residual value guarantee under which the lessee guarantees the asset will be worth at least $30,000 at the end of the term. At commencement, the lessee estimated the shortfall it would probably owe at $0 (the estimated residual value equaled or exceeded the guarantee). Two years later, based on updated market data, the lessee now estimates it will owe $8,000 under the guarantee.

This is a change in amounts probable of being owed under a residual value guarantee — a remeasurement trigger. The lessee adds the present value of the newly probable $8,000 payment to the lease liability, with the offsetting entry to the ROU asset, following the same mechanics as the term-change example above.

Discount Rate: When Do You Update It?

A frequent question is whether the discount rate is reassessed at every remeasurement. The answer is: only in specific circumstances. The rate is updated when there is a change in the lease term, a change in the assessment of a purchase option, or (for lessees applying the practical expedient) when a rate that was contingent on an index or rate becomes fixed. The rate is not updated for a remeasurement driven solely by a change in a residual value guarantee estimate that does not otherwise involve a term or purchase-option reassessment — the original discount rate continues to apply in that narrower case.

Practical Takeaway

Remeasurement is where ASC 842 requires ongoing monitoring, not a one-time calculation at lease inception. Companies with large lease portfolios typically build a checklist tied to specific events — renewal decisions, purchase option assessments, residual value true-ups, subleasing, and impairment indicators — to make sure remeasurement triggers are caught in the period they occur rather than discovered at year-end.