Question

Under IFRS, a lessee will reassess variable lease payments that depend on an index or a rate:

a. only when the lessee remeasures the right-of-use asset and lease liability for other reasons.
b. only when the lessor also reassesses the variable lease payments.
c. whenever there is a change in the cash flows resulting from a change in the reference index or rate.
d. never.

Answer 1

The correct answer is A. Under IFRS, a lessee must reassess variable lease payments dependent on an index or rate whenever there's a change in the underlying index or rate which impacts the cash flows of the lease.

Step-by-step explanation:

An IFRS lessee is required to conduct such reassessment under IFRS 16 – Leases, which deals with accounting for leases. According to IFRS 16, a lessee should reassess the lease liability by remeasuring it to reflect changes in lease payments. This remeasurement includes adjustments for changes in future lease payments that are indexed to a rate – such as inflation or interest rates. Consequently, if the index or rate changes, the lessee must update the lease liability accordingly.

This remeasurement does not depend on the lessor's reassessment or whether the lessee remeasures the right-of-use asset for other reasons. It is a specific requirement focused solely on changes in variable payments due to changes in an index or rate. This approach ensures that the lease liability and the corresponding right-of-use asset on the balance sheet remain representative of the obligations and rights arising from the lease.