When do you need to reassess a lease under IFRS 16?
IFRS 16 requires companies to reassess and remeasure a lease as soon as they become aware of changes that will impact future lease payments or the expected lease term. This applies both to index-driven payment increases and to planned extensions, so that reported lease obligations remain representative of what the company is truly committed to going forward.
Don’t wait for the effective date – remeasure when the change is known
IFRS 16 requires remeasurement to be recognized when a change becomes known, rather than when it formally takes effect. If, for instance, lease payments are expected to increase from January due to indexation, the adjustment should be recorded in the period when that information becomes available.
– As an example, if rent is paid in advance and the new October index is published in mid-November, the lease liability should be remeasured already in December. At that point, it is known that payments will be higher from January onward, says Richard Nilsson, IFRS 16 expert.
Lease extensions? Reassess as soon as it becomes known
When a lease is expected to be extended, the reassessment and remeasurement should be performed as soon as it is clear that an extension will occur.
– It is therefore appropriate to carry out a new assessment as soon as an extension becomes reasonably certain. This applies even if a full year remains on the original lease, Nilsson says.
The underlying objective is for the financial statements to continuously reflect a representative view of the company’s future lease commitments.
– Generally, the more long-term and fixed the underlying assets are, such as real estate, the earlier the reassessment should be made ahead of an extension. For other assets, like vehicles, the decision to extend often comes closer to the end of the contract. In those cases, the remeasurement is recognized in connection with that decision, Nilsson concludes.