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Modification and remeasurement of a lease

ASC 842-10-55-28

Examples of significant events or significant changes in circumstances that a lessee should consider in
accordance with paragraph 842-10-35-1 include, but are not limited to, the following:

a. Constructing significant leasehold improvements that are expected to have significant economic
value for the lessee when the option becomes exercisable

b. Making significant modifications or customizations to the underlying asset

c. Making a business decision that is directly relevant to the lessee’s ability to exercise or not to
exercise an option (for example, extending the lease of a complementary asset or disposing of an
alternative asset)

d. Subleasing the underlying asset for a period beyond the exercise date of the option.

A change in market-based factors alone (e.g., increases in market rents such that rents during renewal
period would now be considered a bargain or change in the current price to purchase a comparable
asset) should not trigger reassessment of the lease term or a lessee option to purchase the underlying
asset. A lessee is not required to continually reassess the lease term absent a significant event or
change in circumstances.

5.3.2 Change in timing or amount of reimbursement for leasehold improvements (i.e., lease
incentives)

Lease incentives for a lessee may be structured in different ways. For example, incentive amounts may
be fixed or variable subject to a cap; they may be paid to the lessee upfront or over time. Often,
incentives are negotiated to reimburse the lessee for amounts spent by the lessee to furnish or improve
the leased property, up to a maximum negotiated amount. The amount and timing of the incentive
may depend on the pace at which the lessee furnishes or improves the leased asset. Although the
amount and timing of the incentive paid to the lessee could vary after lease commencement, it is
generally very unlikely that a lessee would forgo any incentive it negotiated to receive from the lessor.
Accordingly, we believe the lessee should treat the incentive in this scenario as an "in substance fixed
payment" from the lessor to the lessee. We believe a lessee should estimate the timing of the maximum
contractual incentive not yet received and record it as a negative lease payment. This would impact
lease classification and the amount recognized for the right-of-use asset at lease commencement.

Subsequent to lease commencement, if the actual receipt of the cash from the lessor differs in either
timing or amount from the original estimate used to record the receivable, we believe the lessee should
analogize to the remeasurement guidance for a lessee and remeasure the lease incentive receivable
(and hence the right-of use asset) using the same discount rate used at the lease commencement date.

See Example 5-9 for an illustration.

5.3.3 Remeasurement of lease liability

A lease liability should be remeasured on the effective date of the reassessment event or modification
(the date that the modification is approved by both the lessee and lessor) as if the lease were a new
lease that commences on that date.

5-9