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Modification and remeasurement of a lease

The discount rate should not be updated if there is a remeasurement due to a change in lease term or
purchase option if the discount rate at lease inception already reflected the options. As discussed in LG
3.3.4.6, the lessee must make a policy election to determine the discount rate either based on the lease
term used for accounting purposes or based on the initial lease term plus any extension, termination,
and/or purchase options available to the lessee, even when they are not reasonably assured of exercise.
For example, if a lessee with a five-year lease with a three-year renewal option used a discount rate at
lease commencement that already considered the three-year renewal option, the discount rate does
not need to be adjusted upon remeasurement.

For lease payments that vary based on a rate or index, the lessee should determine the lease payments
using the rate or index in effect at the lease remeasurement date. For example, a lessee with lease
payments based on LIBOR should determine the future lease payments using the LIBOR spot rate on
the lease remeasurement date.

The recorded lease liability should be recorded at the remeasured amount with an adjustment to the
right-of-use asset.

5.3.4 Right-of-use asset adjustment

The right-of-use asset will need to be adjusted upon a modification that decreases the lessee’s right of
use. This may occur, for example, when the floor space under lease is decreased or a lessee no longer
has the right to use a standalone asset. A modification to decrease the lease term is not considered a
decrease in the right-of-use. A decrease in the right of use is treated as either a full or partial
termination of the lease. See LG 5.5 for information on the right-of-use asset adjustment in these
cases.

For all other changes (e.g., those that give an additional right of use, increase or decrease lease term,
or increase or decrease lease payments), the lessee should adjust the right-of-use asset by an amount
equal to the adjustment to the lease liability. Because the original lease is not considered terminated
(since the lessee continues to have the right to use the asset identified in the original lease), the lessee
generally should not recognize a gain or loss as a result of the modification. However, if the carrying
amount of the right-of-use asset is reduced to zero, a lessee should recognize any remaining amount of
the remeasurement in net income.

5.3.5 Lease expense subsequent to remeasurement

The determination of lease expense subsequent to remeasurement will depend on the new lease
classification and whether that classification has changed.

5.3.5.1 Finance lease upon remeasurement

If a lease is classified as a finance lease upon remeasurement (regardless of the classification before
remeasurement), a lessee should calculate interest expense on the lease liability based on the discount
rate at the remeasurement date. The right-of-use asset amortization expense should be determined by
calculating a new straight-line amortization amount using the revised asset value and lease term.
When the lease liability is remeasured and the right-of-use asset is adjusted, amortization of the right-
of-use asset should be adjusted prospectively from the date of remeasurement.

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