Lease Reassessment Triggers and Accounting Effects – When and How to Reevaluate Lease Terms

Lease reassessment refers to the requirement under U.S. GAAP (ASC 842) and IFRS (IFRS 16) to recalculate lease liabilities and right-of-use (ROU) assets when specific triggering events occur. These reassessments ensure that the lease reflects updated facts and conditions, such as changes in lease term, payment structure, or the likelihood of exercising renewal options.

This article explains when reassessment is required, the accounting mechanics for lessees and lessors, and how the changes are reflected in financial statements.

1. What Is Lease Reassessment?

Reassessment involves:

✦ Re-evaluating the lease term, payment amounts, or classification

✦ Remeasuring the lease liability and adjusting the ROU asset accordingly

✦ Applying a new discount rate based on updated terms

Reassessment is not optional—it is mandatory when specific events occur.

2. Triggers for Reassessment – Lessee Perspective

A lessee must reassess the lease when:

✦ A change occurs in the lease term (e.g., decision to exercise an option previously not assumed)

✦ A change in assessment of purchase options

✦ A modification not accounted for as a separate lease

✦ A change in variable lease payments linked to index/rate (e.g., CPI)

✦ A change in residual value guarantees

Not required for changes due to market conditions alone unless they affect contractual obligations.

3. Accounting for Reassessment – Lessee

Upon a reassessment trigger:

1. Recalculate the present value of remaining lease payments

2. Use an updated discount rate (incremental borrowing rate at reassessment date)

3. Adjust the lease liability

4. Adjust the ROU asset by the same amount, unless impairment is present

Example:

✦ Lessee previously assumed no renewal

✦ In Year 2, decides to exercise a 3-year renewal option

✦ Lease term extended → lease liability increases by $80,000

Journal entry: Dr. ROU Asset – $80,000 / Cr. Lease Liability – $80,000.

If the remeasurement results in a reduction and the ROU asset balance is insufficient:

Dr. Lease Liability – $25,000 / Cr. ROU Asset – $22,000 / Cr. Gain on Lease Reassessment – $3,000.

4. Lessor Reassessment Requirements

Lessors are generally not required to reassess lease classification after inception unless a modification occurs that is not a separate lease.

In that case:

✦ The lessor may need to reclassify the lease (e.g., from operating to finance)

✦ Adjustments are made to lease receivables and income recognition schedules

Lessor reassessment is less frequent than lessee reassessment.

5. Discount Rate Adjustments

Upon reassessment, the lessee must update the discount rate used to calculate lease liability.

✦ Use current incremental borrowing rate or implicit rate (if known)

✦ This ensures that future payments are valued appropriately based on current economic conditions

6. Disclosure Requirements

Reassessments must be explained in the financial statements when material. Disclosures should include:

✦ Nature and reason for reassessment

✦ Impact on lease liabilities and ROU assets

✦ Use of updated discount rates

✦ Any gains or losses recognized due to changes

Disclosure example: “During Q2, the Company reassessed the lease term for its headquarters after exercising a five-year renewal option. The lease liability increased by $3.2 million, and the ROU asset was adjusted accordingly.”