Quick Summary

• Remeasurement is not routine — a lessee only remeasures the lease liability when a specific reassessment event occurs, not simply because circumstances have evolved.
• The four triggers are: a change in the lease term, a change in the assessed likelihood of exercising a purchase option, a change in a residual value guarantee, and a change in lease payments driven by an index or rate.
• Whether the discount rate is revised depends entirely on which of the four triggers applies — this is the single most common technical error.
• Remeasurement amounts adjust the right-of-use asset, not profit or loss, except where the asset has already been written down to zero.

When Does a Lessee Remeasure the Lease Liability?

Under IFRS 16, a lessee does not revisit the lease liability every time circumstances change. Initial measurement is meant to be durable, and the standard deliberately limits remeasurement to four defined trigger events so that lease accounting does not become a moving target every reporting period.

The four triggers are: (1) a reassessment of the lease term following a change in circumstances within the lessee’s control, (2) a reassessment of whether the lessee is reasonably certain to exercise a purchase option, (3) a change in the amounts expected to be payable under a residual value guarantee, and (4) a change in future lease payments resulting from a change in an index or a rate used to determine those payments, including a change following a market rent review.

Outside these four events, a lessee simply continues amortizing the right-of-use asset and unwinding the lease liability on the original basis, even if market conditions or business plans shift.

Reassessing the Lease Term: Renewal and Termination Options

The lease term reassessment mirrors the logic used at initial recognition: a lessee reassesses whether it is reasonably certain to exercise a renewal option, or reasonably certain not to exercise a termination option, only when a significant event or significant change in circumstances occurs that is within the lessee’s control.

Reassessing Purchase Options

The same “reasonably certain” threshold and the same “significant event within the lessee’s control” trigger apply to purchase options. If a lessee becomes reasonably certain it will exercise a purchase option it previously excluded from the lease term — for example, because it has now committed capital expenditure that only makes economic sense if it owns the asset — the lease liability and right-of-use asset are remeasured to reflect the revised payments, including the purchase price.

In practice, purchase-option reassessment is most often triggered alongside a lease-term reassessment on the same underlying asset, since a lessee that has committed to leasehold improvements or a long-term sub-lease is frequently the same lessee reconsidering whether outright ownership now makes more economic sense than continuing to lease. Where both reassessments happen together, they are applied as a single remeasurement event using one revised discount rate, not treated as two separate remeasurements layered on top of each other.

The Discount Rate for Remeasurement — When It Changes and When It Doesn’t

This is where most preparers go wrong. IFRS 16 does not apply a single rule to every remeasurement — the treatment of the discount rate depends on which trigger caused the remeasurement.

A practical consequence follows directly from this table: for an index-linked lease (say, payments that step up annually with CPI), a lessee remeasures the lease liability only when the index actually changes the cash flows due — typically once a year at the review date — not every time a CPI figure is published. The revised payments are discounted at the unchanged original rate.

Variable Lease Payments Linked to an Index or Rate

Variable payments that depend on an index or a rate are initially measured using the index or rate as at the commencement date — they are not forecast forward. Once the index or rate changes and that change actually varies the cash flows payable, the lessee remeasures the lease liability using the revised payments for the remaining lease term, still applying the unchanged discount rate (unless the change is specifically a floating-rate change, per the table above).

Variable payments that depend on future performance or usage — a percentage of sales in a retail lease, for instance — are excluded from the lease liability altogether and are expensed as incurred, since they do not depend on an index or rate.

A common structuring point worth flagging to clients: where a lease references a floating benchmark rate directly (rather than a fixed uplift or a general price index), each change in that benchmark is, by definition, a remeasurement trigger for both the cash flows and the discount rate together — which can make floating-rate-referenced leases noticeably more volatile to account for than CPI-linked ones, even though both are described loosely as “variable payments” in casual conversation.

How Remeasurement Adjusts the Right-of-Use Asset

When a remeasurement event occurs, the lessee recalculates the present value of the revised lease payments (using the discount rate determined per the rules above) and recognizes the difference between the new liability amount and the carrying amount of the old liability as a corresponding adjustment to the right-of-use asset.

If the right-of-use asset has already been reduced to zero and the remeasurement would produce a further decrease, the excess is recognized immediately in profit or loss instead of creating a negative asset balance.

A Worked Illustration of Lease Term Reassessment

A lessee enters a 5-year office lease with a 3-year renewal option, initially assessed as not reasonably certain to be exercised. The lease liability and right-of-use asset are both initially recognized based on a 5-year term, discounted at an incremental borrowing rate of 6%.

At the start of year 3, the lessee commits to a significant office fit-out with an economic life of 10 years — a leasehold improvement decision that only makes sense if the lessee remains well beyond year 5. This is a significant event within the lessee’s control, triggering reassessment: the lessee now becomes reasonably certain it will exercise the renewal option, extending the lease term to 8 years.

Because this is a lease-term reassessment, the lessee determines a revised discount rate as at the start of year 3 (say, 6.5%, reflecting current borrowing conditions) and recalculates the present value of the remaining payments over the now-8-year term. The increase between this revised liability and the pre-remeasurement carrying amount of the liability is added to the right-of-use asset, which is then amortized over the revised remaining lease term.

Common Mistakes in Lease Liability Remeasurement

• Remeasuring every time an index is published, rather than only when the cash flows actually change at the contractual review date.
• Keeping the original discount rate unchanged when the trigger was a lease-term or purchase-option reassessment, when a revised rate should have been used.
• Revising the discount rate for an index-linked payment change that isn’t tied to a floating interest rate, when the rate should have stayed the same.
• Recognizing the remeasurement adjustment directly in profit or loss instead of against the right-of-use asset (outside the narrow zero-balance exception).
• Waiting for a formal renewal notice before reassessing, instead of reassessing as soon as a significant triggering event occurs within the lessee’s control.