Theory and Practice
This is the point where many implementations quietly degrade: the go-live numbers are fine, but six to twelve months later nobody is consistently capturing modifications, index resets, or term changes—so the balance becomes “stable” for the wrong reason.
Lease accounting doesn’t end at commencement. Changes in circumstances can require revisiting the initial measurements. We discuss lease modifications (changes to the contract terms themselves) and reassessments (changes in estimates under the existing contract, such as option exercise or index-based payment changes). Both IFRS and US GAAP have specific rules for how and when to adjust the lease liability and ROU asset for these situations. In general, IFRS applies a more dynamic remeasurement model, while U.S. GAAP is designed to minimize remeasurement unless specific triggering events occur (RSM US LLP, 2020). UK GAAP (FRS 102) again follows IFRS.
A critical aspect of the updated lease standards is the treatment of remeasurements – situations where the original estimates or terms of a lease change, requiring the amounts on the balance sheet to be updated. Both IFRS 16 and ASC 842 have detailed guidance on when a lessee must remeasure the lease liability (and adjust the ROU asset accordingly). Key triggers for remeasurement include:
Change in lease term – e.g., if the lessee originally was not expected to extend a lease but later does, or vice versa. This could occur because the lessee decides to exercise an extension option (or not to exercise a termination option) contrary to the previous assessment.
Change in assessment of a purchase option – e.g., if the lessee becomes reasonably certain to exercise a purchase option that it previously was not certain to exercise, this changes the lease term to include the purchase and requires remeasurement.
Changes in lease payments due to an index or rate – e.g., rent is linked to CPI or another index interest rate. When that index or rate changes, it can alter future payments.
Other contractual modifications – e.g., if the lease contract is modified to add or remove an underlying asset, or to change the consideration (rent) in a way not originally contemplated.
IFRS 16 requires a lessee to remeasure the lease liability whenever there is a change in the cash flows based on the original terms or certain changes in circumstances (IFRS Foundation, 2016). For example:
If there is a change in lease term or a lease modification that is not accounted for as a separate new lease, the lessee remeasures the liability using a revised discount rate as of the effective date of the change (IASB, 2016). The ROU asset is adjusted by the same amount unless the reduction in the liability exceeds the carrying amount of the asset (in which case a gain might be recognized for the difference). Importantly, IFRS 16 states that if a lease’s scope is decreased (e.g., shortening the term or dropping an asset), the lessee should recognize a proportionate reduction in the ROU asset and liability, and any difference between the two is recorded as a gain or loss at that time (IASB, 2016). This means partial lease terminations can result in immediate Income Statement impacts under IFRS 16.
If there is a change in future lease payments due to an index or rate (like inflation-linked rent adjustments), IFRS 16 requires the lessee to remeasure the lease liability when the adjustment takes effect. For instance, if lease payments are tied to CPI and CPI increases, the lessee calculates the revised lease payments and re-discounts them at the original discount rate, updating the liability and adjusting the ROU asset (IFRS Foundation, 2016; KPMG, 2025a). This ensures the balance sheet reflects the latest expected cash outflows.
If contingent payments become fixed (e.g., a performance-based rent that now becomes payable), or if a residual value guarantee payment changes, those too trigger remeasurement.
In contrast, ASC 842 has a more limited approach to remeasurement for lessees:
Under ASC 842, a lessee does not remeasure the lease liability solely for changes in an index or rate (e.g., CPI changes), unless some other remeasurement trigger occurs (FASB, 2016a; KPMG, 2025a). In other words, if a lease has CPI-linked rent, the lessee initially measures the lease liability using the current CPI and then recognizes any subsequent CPI-driven increases in rent as variable lease expenses in the period incurred, without adjusting the liability (KPMG, 2025a). A remeasurement of the liability will happen if, for example, the lease term is extended or there is a modification to the lease, but not just because of routine inflation adjustments. This is a deliberate difference: the FASB chose to avoid the cost and complexity of continual remeasurement for inflation changes, whereas IFRS 16 opted for greater precision by updating the liability when cash flows change.
ASC 842 does require remeasurement if the lease term assumption changes (similar to IFRS 16) or if the lessee’s assessment of a purchase option changes, or if there is a modification that is not a separate contract. In these cases, the lessee will remeasure the liability, typically using a new discount rate at the date of the change (which is slightly different from IFRS 16, where some changes use the original rate and some use a revised rate, depending on the nature of the change).
For reductions in scope or term, ASC 842’s guidance results in a different accounting than IFRS 16. If a lease’s term is shortened, under ASC 842 the lessee generally adjusts the ROU asset and liability without recognizing any immediate gain or loss (the remaining ROU asset is typically adjusted proportionately). IFRS 16, as noted, might record a partial gain or loss in such cases. This is another area where the standards diverged – IFRS 16 wanted each lease component change to be recognized immediately in income if it reduces scope, whereas FASB decided to spread that effect over the remaining term (KPMG, 2025a).
GASB 87 and SFFAS 54 adopt right‑to‑use lease accounting models that incorporate remeasurement requirements broadly consistent with those under IFRS 16. Under GASB 87, the lease liability must be remeasured when the lease term is reassessed or when changes occur in the underlying obligation to make lease payments (GASB, 2017) .Interestingly, GASB 87 does not require remeasurement purely for a change in an index or rate unless that change affects future payments and the change in payments is objectively measurable (some governments have interpreted this as meaning that if CPI increases, they may treat that as a periodic expense, similar to ASC 842’s approach). SFFAS 54, the federal standard, also stipulates remeasurement when the lease term or other key assumptions change (FASAB, 2018). Both standards aim to balance accuracy with cost: they want government financial statements to reflect current obligations, but without requiring constant re-calculation for minor updates.
Complexity and Spreadsheets: As discussed before, handling remeasurements is one of the hardest tasks if using spreadsheets. Every remeasurement can require revising formulas and schedules, and the more leases an entity has, the more likely remeasurement events will occur at different times. This is where lease software greatly simplifies compliance – the system will prompt or automatically remeasure when needed.
In summary, remeasurements ensure that the lease assets and liabilities on the balance sheet don’t become stale. IFRS 16 takes a more frequent remeasurement approach (reflecting changes in cash flow expectations like index-based rent changes and revised assessments of options), whereas ASC 842 takes a slightly more static approach (no remeasurement for index changes alone, only when other triggers occur) (KPMG, 2025a). Both standards, however, require remeasurement for substantive changes in the lease (like modifications or decisions about options), which means lessees must have processes in place to monitor their leases. For example, a company must keep track of when an option decision is approaching or when an index-based rent reset happens, and then adjust the accounting accordingly if needed. Neglecting to do so can lead to material errors – a cautionary tale for companies relying on manual processes. As leases often span many years, it’s vital for lessees to have systems that will flag these remeasurement events and compute the impacts accurately, ensuring continuous compliance and up-to-date financial reporting.
Key scenarios are discussed in the following lessons.