Reassessment of the lease liability

Learning objectives

• Distinguish remeasurements using a revised discount rate (change in lease term, change in the assessment of a purchase option) from those using an unchanged rate (residual value guarantee, index or rate, except a floating interest rate).L2, L3
• Calculate the remeasurement of the lease liability, its adjustment to the right-of-use asset and the excess recognised in profit or loss when the right-of-use asset is reduced to zero.L3, L4

Normative references

• IFRS 16 §39After the commencement date, the lessee applies paragraphs 40 to 43 to remeasure the lease liability to reflect changes in the lease payments, and recognises the amount of the remeasurement as an adjustment to the right-of-use asset. If the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the lease liability, the remaining amount is recognised in profit or loss.
• IFRS 16 §40The lessee remeasures the lease liability by discounting the revised lease payments using a revised discount rate if (a) there is a change in the lease term (paragraphs 20-21) or (b) there is a change in the assessment of an option to purchase, assessed considering the events and circumstances in paragraphs 20-21; the revised payments then reflect the change in amounts payable under the purchase option.
• IFRS 16 §41In applying paragraph 40, the revised discount rate is the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or otherwise the lessee's incremental borrowing rate at the date of reassessment.
• IFRS 16 §42The lessee remeasures the lease liability by discounting the revised lease payments if (a) there is a change in the amounts expected to be payable under a residual value guarantee, or (b) there is a change in future lease payments resulting from a change in an index or a rate (including, for example, after a market rent review); in the latter case, the remeasurement occurs only when there is a change in the cash flows, i.e. when the adjustment to the lease payments takes effect, and the revised payments for the remaining lease term are determined on the basis of the revised contractual payments.
• IFRS 16 §43For paragraph 42, the lessee uses an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates; it then uses a revised discount rate that reflects changes in the interest rate.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

11 questions

• Orvane leases a warehouse. After the commencement date, several events change the expected lease payments. In which of these cases must Orvane remeasure its lease liability by discounting the revised lease payments using a revised discount rate?L2
• The Talvio group reviews its leases at year end. In which situations is the lease liability remeasured using an unchanged discount rate? (several answers)L2
• Brévia's office lease provides for an annual rent review based on a published index, applicable on each 1 January. The index published in October 20X2 announces a rent increase from 1 January 20X3. On which date does Brévia remeasure its lease liability to reflect this increase?L3
• Calvène leases a workshop; the annual payment of {annual_payment} is paid at the end of each year. At 1 January 20X4, {remaining_years} payments remain and the lease liability amounts to {old_liability} (original rate {original_rate}). On that day, Calvène exercises an extension option of {extension_years} years, at the same rent, which was not included in the lease term. The interest rate implicit in the lease cannot be readily determined; Calvène's incremental borrowing rate at that date is {revised_rate}. Compute the remeasured lease liability and the adjustment to the right-of-use asset (rounded to the nearest euro).L3
• The carrier Nordelis leases a logistics platform ({yearly_rent} per year, paid at year end). At the end of 20X5, after significant leasehold improvements decided by Nordelis and not anticipated at the outset, management becomes reasonably certain to exercise the {option_years} years-year extension option at the same rent, previously excluded from the lease term. {payments_left} years non-cancellable payments remain; the lease liability is {liability_before} (initial rate {initial_rate}). The interest rate implicit in the lease cannot be readily determined and the current incremental borrowing rate is {ibr_now}. Determine the remeasured lease liability and the adjustment to the right-of-use asset (rounded to the nearest euro).L4
• The retailer Ambrelis leases a shop; the payment, made at year end, is indexed to a price index. At 1 January 20X3, the effective date of the review, the annual payment rises from {old_payment} to {new_payment} for the {payments_remaining} remaining payments. The lease liability amounts to {carrying_liability} before the review, computed at a rate of {lease_rate}; Ambrelis's incremental borrowing rate at that date is {current_ibr}. Compute the remeasured lease liability and the adjustment to the right-of-use asset (rounded to the nearest euro).L3
• The Solaris clinic leases a scanner; the payment, made at year end, follows a healthcare cost index. The management controller proposes remeasuring the lease liability at the current market rate of {market_rate}, which he considers more representative. At 1 January 20X4, when the review takes effect, the annual payment rises from {base_rent} to {indexed_rent} for the last {rents_due} payments. The lease liability is {liability_before} (original rate {original_rate}). Compute the remeasured lease liability and the increase in the right-of-use asset (rounded to the nearest euro).L4
• Lumeo leases a bottling line and guarantees the lessor the residual value of the equipment, which will be returned in one year. At the end of 20X5, thanks to a strong second-hand market, the amount Lumeo expects to pay under this guarantee in one year falls from {guarantee_before} to {guarantee_after}. The discount rate of the lease is {discount_rate}; the carrying amount of the right-of-use asset is {rou_carrying}. Record the remeasurement entry (for simplicity, the decrease in the right-of-use asset is posted directly to the right-of-use asset account).L4
• The car rental company Vectra is the lessee of a fleet of electric shuttles that it will return in {years_to_end} years while guaranteeing their residual value. At the end of 20X6, Vectra revises the amount it expects to pay under this guarantee at maturity: {expected_payment_new} instead of {expected_payment_old}. The discount rate of the lease is {rate}, and the right-of-use asset has a carrying amount of {rou_amount}. Record the remeasurement (the decrease in the right-of-use asset is posted directly to its account).L4
• Herbonne Printing leases a digital press; {rents_left} annual payments of {annual_rent} remain, paid at year end, and the lease liability amounts to {liability_now} (original rate {first_rate}). After having the press adapted to its special formats, Herbonne becomes reasonably certain to exercise the purchase option of {exercise_price}, payable at the end of the lease, which it had not taken into account so far. The interest rate implicit in the lease cannot be readily determined; Herbonne's incremental borrowing rate is now {new_ibr}. Record the remeasurement entry (amount rounded to the nearest euro).L3
• The Kestrel laboratory leases a research building with a purchase option that it had not considered reasonably certain to exercise. After installing very costly clean rooms, Kestrel concludes that it will exercise the option. The lessor does not provide the data needed to compute the interest rate implicit in the lease for the remaining term. The CFO hesitates between several treatments. Which one complies with IFRS 16?L4