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Modification and remeasurement of a lease

5.3.5.2 Operating lease upon remeasurement

If there is no change to the classification of an operating lease upon remeasurement, a lessee should
calculate the single lease expense after the remeasurement as follows:

Future undiscounted cash flows + (the right-of-use asset – the lease liability after
the remeasurement)
Remaining lease term

If a lease originally classified as a finance lease is remeasured and classified as an operating lease, any
difference between the carrying amount of the right-of-use asset after recording the remeasurement
adjustment and the carrying amount of the right-of-use asset that would have resulted from initially
classifying the lease as an operating lease should be accounted for like a rent prepayment or a lease
incentive. See LG 4.2.2.1 for information on accounting for rent prepayments and lease incentives.

5.3.6 Illustrative examples of lease remeasurement

Example 5-2, Example 5-3, Example 5-4, Example 5-5, Example 5-6, Example 5-7, Example 5-8 and
Example 5-9 illustrate how to remeasure a lease for a lease modification or other event.

EXAMPLE 5-2

Remeasurement of an operating lease with variable lease payments - no change to lease classification

On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease property to be used
as a retail store.

The lease has the following terms:

Lease commencement date January 1, 20X1

Initial lease term 5 years

Renewal option 3 years

Annual lease payments for the initial term $100,000

Annual lease payments for the renewal option $114,400
Lease increase based on changes in the The annual lease payment in the base term will
Consumer Price Index (CPI) increase based on the annual increase in the CPI
at the end of the preceding year. For example,
the payment due on 01/01/X2 will be based on
the CPI available at 12/31/X1.

Payment date Annually on January 1

Initial direct costs $10,000

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