Subsequent Measurement & Remeasurement
Accounting for a lease doesn't end on Day 1. You must track the liability, depreciate the asset, and react to changes in the contract.
1The Lease Liability Journey
The lease liability is measured using the Amortized Cost method. Each period, you increase the liability for interest and decrease it for payments made.
Interest Expense
Calculate interest by multiplying the carrying amount of the liability by the discount rate. Recognized in Profit or Loss.
Lease Payments
The actual cash paid reduces the liability. Note: This cash flow should be split between interest and principal in your SOCF.
2Depreciating the ROU Asset
Generally, lessees use the Cost Model for the ROU asset (unless they use the Revaluation Model or Fair Value Model for the underlying asset class).
Depreciation Period:
If ownership transfers / purchase option is likely:
Depreciate over the Useful Life of the asset.
Otherwise:
Depreciate over the shorter of the Useful Life or the Lease Term.
3Remeasurement
Sometimes, events happen that change the future lease payments. When this happens, you must "adjust" the liability and usually the ROU asset too.
When to remeasure?
- Change in the lease term (e.g., you now expect to extend).
- Change in the assessment of a purchase option.
- Change in the amounts expected to be payable under residual value guarantees.
- Change in future lease payments resulting from a change in an index or rate.
Crucial Rule: Most remeasurements involve adjusting the Lease Liability and making a corresponding adjustment to the ROU Asset.
Exam Tip: The Carrying Amount Trap
If a remeasurement reduces the ROU asset to zero, any remaining adjustment is recognized in Profit or Loss. You can't have a negative ROU asset!