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Modification and remeasurement of a lease

When reassessing lease classification for the events noted in Figure 5-2, a lessee should consider the
terms and conditions as of that date. In other words, the lessee should reassess lease classification
using the fair value and remaining economic life of the underlying asset on the reassessment date.

As discussed in ASC 842-10-15-6, a lessee must reassess whether a contract is (or contains) a lease
only if the terms of the contract are changed.

5.3.1 Lease remeasurement

A lessee should remeasure the lease liability and adjust the right-of-use asset upon the occurrence of
any of the events described in ASC 842-10-35-4.

Excerpt from ASC 842-10-35-4

A lessee shall remeasure the lease payments if any of the following occur:

a. . . .

b. A contingency upon which some or all of the variable lease payments that will be paid over the
remainder of the lease term are based is resolved such that those payments now meet the
definition of lease payments. For example, an event occurs that results in variable lease payments
that were linked to the performance or use of the underlying asset becoming fixed payments for
the remainder of the lease term. However, a change in a reference index or a rate upon which
some or all of the variable lease payments in the contract are based does not constitute the
resolution of a contingency subject to (b) (see paragraph 842-10-35-5 for guidance on the
remeasurement of variable lease payments that depend on an index or a rate).

c. There is a change in any of the following:

1. The lease term, as described in paragraph 842-10-35-1. A lessee shall determine the revised lease
payments on the basis of the revised lease term.

2. The assessment of whether the lessee is reasonably certain to exercise or not to exercise an option
to purchase the underlying asset, as described in paragraph 842-10-35-1. A lessee shall determine
the revised lease payments to reflect the change in the assessment of the purchase option.

3. Amounts probable of being owed by the lessee under residual value guarantees. A lessee shall
determine the revised lease payments to reflect the change in amounts probable of being owed by
the lessee under residual value guarantees.

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