IFRS 16 has been effective for several years, yet remeasurement errors remain one of the most common findings in external audits of lessees. The standard requires the lease liability to be remeasured — and the right-of-use asset adjusted accordingly — whenever certain events occur. In practice, many finance teams focus on formal lease modifications and overlook a range of other remeasurement triggers that arise in the ordinary course of business.
Trigger 1: Reassessment of an Extension or Termination Option
If a lessee initially concludes that it is not reasonably certain to exercise an extension option, but circumstances change such that it becomes reasonably certain (or vice versa), the lease liability must be remeasured using a revised discount rate at the date of reassessment.
This is the trigger most commonly missed. Companies often have leases with extension options that were excluded from the initial lease term — and then simply continue occupying the premises without formally reassessing whether the option has become reasonably certain. Under IFRS 16, a significant event or change in circumstances that is within the lessee's control triggers a mandatory reassessment. Moving the business into a refurbished space, investing in leasehold improvements, or making a strategic decision to anchor operations at a location are all indicators that should prompt reassessment.
Trigger 2: Changes to a Residual Value Guarantee
Where a lease liability includes amounts payable under a residual value guarantee, any change in the expected amount payable under that guarantee triggers a remeasurement. This typically arises in vehicle or equipment leases where the lessee has guaranteed a minimum residual value — and the actual market value is now expected to differ materially from the guaranteed amount. Finance teams that set the residual value guarantee at inception and never revisit it are likely carrying an inaccurate lease liability.
"The most dangerous IFRS 16 remeasurement errors are the ones no one is looking for — events that feel routine but legally change the economics of the lease."
Trigger 3: Changes in an Index or Rate Used to Determine Lease Payments
Variable lease payments linked to an index (such as CPI) or a rate (such as a reference interest rate) are included in the lease liability based on the index or rate at the commencement date. The liability is remeasured only when there is a change in future lease payments — i.e., when the actual payment changes as a result of the index or rate movement, not when the index moves. In an inflationary environment, this means many lessees should be remeasuring their CPI-linked lease liabilities at each rent review date.
Trigger 4: A Change in the Assessment of a Purchase Option
If a lease contains a purchase option and circumstances change such that the lessee's assessment of whether it is reasonably certain to exercise that option changes, a remeasurement is required. The revised lease liability is measured at the present value of revised future lease payments, discounted at a revised rate. This trigger is analogous to the extension option reassessment but applies specifically to options to purchase the underlying asset.
Trigger 5: Variable Payments that Become In-Substance Fixed
IFRS 16 paragraph 38(b) requires inclusion in the lease liability of variable lease payments that are, in substance, fixed. If a payment that was initially structured as variable (and therefore excluded) subsequently becomes in-substance fixed — for example, because the only realistic option is to pay a "variable" minimum — it must be brought into the lease liability at that point.
This commonly arises where a lease provides for variable payments based on usage, but the minimum usage threshold is effectively always met. Finance teams should periodically reassess whether payments initially classified as variable have effectively become fixed in substance.
How to Account for a Remeasurement
When any of these triggers occurs, the accounting is:
- Remeasure the lease liability at the present value of revised remaining lease payments, using either the revised discount rate (for triggers 1 and 4) or the original discount rate (for triggers 2, 3, and 5)
- Adjust the right-of-use asset by the same amount as the change in the lease liability
- If the ROU asset is reduced to zero and the lease liability still decreases, recognise the excess reduction in profit or loss
- Document the trigger, the revised inputs, and the remeasurement calculation for audit purposes