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Modification and remeasurement of a lease

Before remeasuring the lease liability, a lessee must first reallocate the remaining contract
consideration between the lease and nonlease components using the relative standalone price of each
component on the remeasurement date if the remeasurement is due to one of the following:

□ Lease contract is modified in such a way that the combined contract is accounted for as one lease

□ An event occurs that gives the lessee a significant economic incentive to exercise, or not exercise a
renewal option or purchase option

However, if the remeasurement is due to either (1) a contingency on which variable payments are
based is met such that the variable payment become fixed or (2) amounts owed under a residual value
guarantee become probable, the reallocation of remaining consideration can be done in two ways. A
lessee can make an accounting policy choose to either use:

□ the same basis as the initial allocation of the consideration in the contract (or the latest
modification not accounted for as a separate contract), or

□ the relative standalone price of each component on the remeasurement date.

A lessee should apply their policy consistently for all remeasurements. See LG 2.4.3 for information
regarding the allocation of consideration.

ASC 842-20-35-4 and 35-5 provide guidance on the remeasurement of a lease liability.

ASC 842-20-35-4
After the commencement date, a lessee shall remeasure the lease liability to reflect changes to the lease
payments as described in paragraphs 842-10-35-4 through 35-5. A lessee shall recognize the amount
of the remeasurement of the lease liability as an adjustment to the right-of-use asset. However, if the
carrying amount of the right-of-use asset is reduced to zero, a lessee shall recognize any remaining
amount of the remeasurement in profit or loss.

ASC 842-20-35-5
If there is a remeasurement of the lease liability in accordance with paragraph 842-20-35-4, the lessee
shall update the discount rate for the lease at the date of remeasurement on the basis of the remaining
lease term and the remaining lease payments unless the remeasurement of the lease liability is the
result of one of the following:

a. A change in the lease term or the assessment of whether the lessee will exercise an option to
purchase the underlying asset and the discount rate for the lease already reflects that the lessee
has an option to extend or terminate the lease or to purchase the underlying asset.

b. A change in amounts probable of being owed by the lessee under a residual value guarantee (see
paragraph 842-10-35-4(c)(3)).

c. A change in the lease payments resulting from the resolution of 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
(see paragraph 842-10-35-4(b)).

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