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Modification and remeasurement of a lease

Question 5-1

Lessee Corp enters into a five-year lease with payments that increase based on increases in the
Consumer Price Index (CPI), but cannot decrease (i.e., the increase creates a new floor for lease
payments). As CPI increases, should a lessee remeasure a lease liability to include the impact of the
increase to date?

PwC response
No, a lessee should not remeasure a lease liability when payments increase based on a change in CPI.
The change to a reference index upon which some or all of the variable lease payment is based does not
constitute the resolution of a contingency. The lease payments continue to be variable as they may
increase based on future changes in the CPI. The payments are not fixed and therefore do not meet the
definition of lease payments.

Question 5-2

Lessee Corp enters into a five-year lease with payments that increase based on increases to the CPI,
capped at a cumulative increase of 7%. When CPI reaches the cap, should lease payments be adjusted
to include the 7% increase?

PwC response
Yes. The lease payments become fixed because additional increases in CPI will not change the payment
amount (because CPI is capped at 7%); therefore, the payments meet the definition of lease payments.

When there is a change in the lease term or probability of exercising an option based on the occurrence
of any of the events described in ASC 842-10-35-1, in connection with remeasuring the lease liability
and adjusting the right-of-use asset, a lessee should also reassess the lease classification.

ASC 842-10-35-1

A lessee shall reassess the lease term or a lessee option to purchase the underlying asset only if and at
the point in time that any of the following occurs:

a. There is a significant event or a significant change in circumstances that is within the control of
the lessee that directly affects whether the lessee is reasonably certain to exercise or not to exercise
an option to extend or terminate the lease or to purchase the underlying asset.

b. There is an event that is written into the contract that obliges the lessee to exercise (or not to
exercise) an option to extend or terminate the lease.

c. The lessee elects to exercise an option even though the entity had previously determined that the
lessee was not reasonably certain to do so.

d. The lessee elects not to exercise an option even though the entity had previously determined that
the lessee was reasonably certain to do so.

5-8