Cutting the Time to Remeasure Lease Liabilities and ROU Assets

3 min read
September 10, 2020
CoStar Real Estate Manager Blog

Cutting the Time to Remeasure Lease Liabilities and ROU Assets

Lease accounting standards ASC 842 and IFRS 16 require lessees to remeasure the lease liability, the ROU asset or both when certain events occur during the term of a lease. If accounting teams are using a spreadsheet, remeasurement may take hours, but with lease accounting software it takes only seconds.   

When to Remeasure

Both standards require lessees to remeasure the lease liability and ROU asset when events occur that change the duration of a lease or its payments. Both the duration and payments are key variables in determining lease liability and ROU asset balances. Changes in payments or the duration of the lease may stem from option renewals, amendments, terminations, or lease extensions. When lessees take actions that imply they will exercise an option to extend the lease, they need to remeasure. For example, lessees who make a significant improvement to a leased asset close to the end of their lease or who sublease their leased asset to another party beyond the duration of their existing lease typically intend to extend their lease. When they make the improvement, sign the sublease, make changes to the duration of a lease, or change the payment schedule, both ASC 842 and IFRS 16 require lessees to remeasure the ROU asset and lease liability.  

Changing a lease is not the only cause for remeasurement. ASC 842 and IFRS 16 require remeasurement of the ROU asset upon impairment of a leased asset. An impairment occurs when an asset no longer holds its value due to changing market conditions, new regulations, or physical damage.  

How to Remeasure Manually

To remeasure a lease in a spreadsheet, accountants must revise the amortization schedule, which contains the monthly balances of the ROU asset and lease liability. Accountants must recalculate the lease liability using a revised net present value calculation and an appropriate discount rate. They also must recalculate the ROU asset using a variety of different calculations depending on the cause of the remeasurement, such as a renewal, partial termination, or impairment. If the lease liability increases or decreases by an amount that’s different from the amount the ROU asset increases or decreases, a gain or loss will need to be calculated. These activities help create the revised amortization schedule, which accountants will use to support future lease accounting journal entries, reconciliations, and reports. Each time a lease needs to be remeasured, it could take accountants hours to manually recalculate the ROU asset and lease liability.  

Simplifying Remeasurement

Leasing software should allow lessees to simplify or automate remeasurement using the following processes:

  • Renewals/Extensions: When a lease is renewed or extended, the new terms and added liability and ROU asset should automatically be updated to the revised amortization schedules.
  • Data Corrections: Incorrect data—such as rent expense or the discount rate—that have already been entered into leasing software should be able to be changed in an instant and be adjusted retroactively with the catchup entry booked in the next open period.
  • Impairment: When an asset loses its value, a lessee should be able to adjust the value so that the system automatically updates the amortization schedule.
  • Partial Termination: When a lessee decides to exit or abandon a portion of a leased asset, once the lessee updates the expenses, the system should automatically recalculate the lease liability and facilitate the recalculation of the ROU asset.
  • Termination: When lessees commit to exit or abandon a property sometime in the future, the new lease terms–such as the lease payments and length of the lease–should be entered into the leasing software, which then should automatically update the lease liability and ROU asset in the amortization schedule. 
  • Full Termination: When a lessee decides to exit or abandon a property effective immediately, the software should automatically calculate a gain or loss resulting from the difference in the ending balances of the ROU asset and lease liability.

Leasing Software

Without user-friendly lease accounting software that automates remeasurement, the manual calculations required for every lease modification and impairment will cost hours in time and will increase the likelihood of errors. Lease accounting software can instantaneously remeasure leases. The software should also include the ability to automate all the remeasurement types listed above, record journal entries, and reflect the changes in financial reports. When information about a remeasurement is received after month-end close, the software should automate remeasurement and true-up entries in the next open accounting period.