Discount Rate Updates Guide
How to Update Lease Discount Rates at Reassessment & Remeasurement Events
Under ASC 842, the discount rate used to measure the lease liability is set at lease commencement and is generally not updated for routine market rate changes during the lease term. However, specific remeasurement and reassessment events require the lessee to update the discount rate. Events triggering rate update include lease modifications that are not separate contracts, reassessment of the lease term (such as when exercise of a renewal option becomes reasonably certain), reassessment of purchase option exercise, resolution of a contingency causing previously variable payment to become fixed, and certain other reassessment triggers. When a remeasurement event occurs, the lessee uses its current incremental borrowing rate at the remeasurement date — not the rate at original commencement. Private companies that elected the risk-free rate practical expedient apply the current risk-free rate at remeasurement. This guide covers the distinction between initial rate selection and rate updates, events triggering updates, remeasurement mechanics, determining the current rate, common errors, and the documentation required for audit defense.
⚡ Key Takeaway
Under ASC 842, the discount rate used to measure the lease liability is set at lease commencement and is generally not updated for routine market rate changes during the lease term. However, specific remeasurement and reassessment events require the lessee to update the discount rate — a critical mechanic distinct from initial rate selection. Events triggering rate update include: lease modifications that are not separate contracts; reassessment of the lease term (such as when exercise of a renewal option becomes reasonably certain or is no longer reasonably certain); reassessment of whether the lessee will exercise a purchase option; resolution of a contingency causing a previously variable payment to become fixed; and certain other reassessment triggers. When a remeasurement event occurs, the lessee uses its current incremental borrowing rate (IBR) at the remeasurement date — not the rate at original lease commencement. Private companies that elected the risk-free rate practical expedient apply the current risk-free rate at remeasurement. Documentation of remeasurement triggers, the current rate at remeasurement, and the calculation methodology supports audit defense.
Specific Triggers
Routine changes don’t trigger; specific events do
Current Rate
At remeasurement, not original commencement
Material Effect
Rate updates substantially change lease liability
Initial Rate Selection vs Rate Update
The discount rate used to measure the lease liability is one of the most significant inputs in ASC 842 lease accounting. At lease commencement, the lessee selects a discount rate based on a hierarchy: use the rate implicit in the lease if readily determinable, otherwise use the lessee’s incremental borrowing rate (IBR) at commencement. Private companies have the option to use a risk-free rate practical expedient instead of IBR. The rate selected determines the lease liability calculation and indirectly affects the ROU asset and the lease classification test. After commencement, the discount rate is generally fixed for the duration of the lease — routine market rate changes (general interest rate movements, changes in the lessee’s credit position, market spread changes) do NOT trigger reassessment of the discount rate. This is a deliberate design choice of ASC 842 to avoid continuous remeasurement of every lease. The lease liability continues to be measured using the rate set at commencement until a specific event triggers an update. However, certain specific events DO require the lessee to update the discount rate to a current rate. These remeasurement triggers are specific events affecting the lease itself — modifications, term reassessments, option reassessments, contingency resolutions, and similar events. When such an event occurs, the lessee uses its current discount rate at the remeasurement date rather than the original commencement rate. The mechanics matter: an incorrect understanding of when rate updates apply can produce material errors in lease liability and ROU asset balances. The distinction between initial rate selection (covered separately in our IBR guide) and rate updates at remeasurement events is important. Initial rate selection determines the starting point. Rate updates determine what happens when specified events occur during the lease term. Both must be applied correctly for accurate lease accounting.Set at Commencement
The discount rate is set at lease commencement and is generally fixed for the duration of the lease.No Routine Updates
Routine market rate changes do not trigger discount rate updates. Continuous remeasurement is not required.Specific Events Trigger Updates
Specific events affecting the lease — modifications, reassessments, contingency resolutions — trigger discount rate updates.Current Rate at Update
When an update is triggered, the lessee uses its current rate at the remeasurement date, not the original rate.Events That Trigger Rate Updates
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1
Lease Modifications Not Separate Contracts
A modification that is not accounted for as a separate contract triggers remeasurement of the lease liability using the current discount rate. The modification could be a change in lease term, change in scope, change in consideration, or other modification not creating a separate contract. -
2
Lease Term Reassessment
When the lessee’s assessment of whether to exercise a renewal option or not exercise a termination option changes (an option becomes reasonably certain or is no longer reasonably certain), the lease liability is remeasured using the current discount rate. The reassessment is triggered by significant events or changes in circumstances within the lessee’s control. -
3
Purchase Option Reassessment
When the lessee’s assessment of whether to exercise a purchase option changes, the lease liability is remeasured using the current discount rate. Similar to lease term reassessment, the trigger is significant events or changes in circumstances. -
4
Contingency Resolution
When a contingency that was the basis for variable lease payments is resolved such that the payments now meet the definition of in-substance fixed lease payments, the lease liability is remeasured to include those payments using the current discount rate. -
5
Residual Value Guarantee Changes
When the lessee’s assessment of amounts expected to be payable under a residual value guarantee changes, the lease liability is remeasured. The current discount rate is used for the remeasurement. -
6
Index or Rate Changes
Important exception: when variable payments dependent on an index or rate (like CPI) change due to routine index movements, the lease liability is NOT remeasured and the discount rate is NOT updated. Only at the next event triggering remeasurement does the index/rate also update to current values. -
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Other Reassessment Triggers
Various other specific events under ASC 842 trigger reassessment. Each should be evaluated against the specific guidance for the trigger.
Remeasurement Mechanics
Use Current Rate
At the remeasurement date, use the discount rate that would apply if the lease were entered into today — current IBR for most lessees, current risk-free rate for private companies that elected the expedient.Recalculate Liability
Recalculate the lease liability using the updated lease terms (modified payments, modified term, modified options) and the current discount rate. The new lease liability replaces the prior balance.Adjust ROU Asset
Adjust the ROU asset by the same amount as the lease liability change. The ROU asset adjustment typically maintains the relationship between liability and asset — if the liability increases by $100, the ROU asset increases by $100 (subject to ROU asset minimum of zero).Apply Updated Amortization
Going forward, the new lease liability balance amortizes using the new discount rate. The new lease cost may differ from prior periods reflecting the updated rate.Document Trigger
Document the specific event that triggered the remeasurement, the current rate used, and the calculation methodology. Documentation supports audit defense.Reclassification Check
A modification triggering remeasurement also requires reassessment of lease classification under the five-criteria test. The classification may change from operating to finance or vice versa.Determining the Current Rate
Current IBR
The current IBR at the remeasurement date — not the rate at original lease commencement, not a historical average. The current IBR reflects current market rates, the lessee’s current credit position, and current market spreads.Remaining Lease Term
The IBR considers the remaining lease term, not the original term. A 10-year lease with 5 years remaining uses a 5-year IBR for remeasurement; the original commencement may have used a 10-year IBR.Risk-Free Rate (Practical Expedient)
Private companies that elected the risk-free rate practical expedient use the current risk-free rate at remeasurement — such as a current Treasury rate matching the remaining lease term.Same Methodology
The methodology for determining the current rate should be consistent with the methodology used at original commencement — same approach to credit spreads, term matching, collateralization adjustments, and other inputs.Common Errors and Their Effects
Failing to Update Rate
Using the original discount rate when a remeasurement event has occurred produces an incorrect lease liability. The error compounds going forward as the wrong rate is applied to recalculations.Updating Rate When Not Required
Updating the discount rate for routine market changes or events that don’t trigger remeasurement produces unnecessary volatility and is technically incorrect under ASC 842.Using Wrong Remaining Term
Using the original lease term instead of the remaining term when determining the current rate produces an incorrect rate. The remaining term affects the appropriate point on the yield curve.Inconsistent Methodology
Using a different methodology for the current rate than was used at original commencement produces inconsistencies. The methodology should be consistent across commencement and remeasurements.Missing Modifications
Failing to identify modifications that should trigger remeasurement produces lease liability balances that don’t reflect current lease terms. The error may not be discovered until audit.Documentation Gaps
Failing to document the trigger, current rate, and methodology creates audit defense difficulty. Documentation should be created contemporaneously with the remeasurement.How LeaseCommand Helps
LeaseCommand supports remeasurement workflow through structured tracking, automated calculations, and audit-ready documentation.Modification Workflow
Structured workflow for processing modifications and reassessments including identification of remeasurement triggers and calculation of resulting adjustments.Rate Management
Tracking of discount rates used at commencement and updates at each remeasurement event, supporting consistent methodology application.Updated Amortization
Automatic generation of updated amortization schedules following remeasurement, applying the new rate and updated lease terms.Documentation
Documentation of remeasurement triggers, current rate used, and methodology supporting audit defense.ERP Integration
Journal entries for remeasurement adjustments flow through ERP integration with Oracle NetSuite, Sage Intacct, Restaurant365, and QuickBooks Online.Audit Trail
Complete audit trail of modifications, remeasurements, and rate updates supporting external audit walkthroughs.Manage Discount Rate Updates Correctly
LeaseCommand handles remeasurement workflow including discount rate updates at triggering events with automated calculations and audit-ready documentation.Frequently Asked Questions
Under ASC 842, the discount rate is generally fixed at lease commencement and is not updated for routine market rate changes. However, specific events trigger updates: lease modifications that are not separate contracts; lease term reassessments where the lessee’s assessment of renewal or termination option exercise changes; purchase option reassessments where the lessee’s assessment of purchase option exercise changes; contingency resolutions where previously variable payments become in-substance fixed; residual value guarantee changes where the lessee’s assessment of expected payment changes; and certain other reassessment triggers. Routine market changes — general interest rate movements, changes in the lessee’s credit spread, market changes in lending terms — do NOT trigger updates. The ASC 842 design avoids continuous remeasurement by limiting updates to specific events. When an update is triggered, the lessee uses its current discount rate at the remeasurement date rather than the original commencement rate. The distinction between routine changes (no update) and triggering events (update) is critical for correct application.
When a remeasurement event triggers a discount rate update, the lessee uses its current discount rate at the remeasurement date. For most lessees, this is the current incremental borrowing rate (IBR) considering current market rates, the lessee’s current credit position, current market spreads, and the remaining lease term. For private companies that elected the risk-free rate practical expedient under ASC 842, the current risk-free rate at remeasurement applies — such as a Treasury rate matching the remaining lease term. Several important considerations apply: the remaining lease term (not the original term) is used — a 10-year lease with 5 years remaining uses a 5-year IBR for remeasurement; the methodology should be consistent with that used at original commencement — same approach to credit spreads, term matching, and other inputs; the rate should reflect current market conditions at the remeasurement date, not historical averages. The current rate often differs substantially from the original rate — producing material differences in remeasured lease liability balances.
No. Routine CPI escalations — actual CPI movements between commencement and the next remeasurement event — do NOT trigger discount rate updates. The lease liability for CPI-escalated payments is calculated at commencement using the CPI rate at that time, and that calculation continues without update for actual CPI movements. When a remeasurement event does occur (for a different reason — modification, term reassessment, etc.), the CPI rate is also updated to the current rate at the remeasurement date along with the discount rate. The CPI variance between calculated and actual that accrued during the period flows through current period expense without lease liability adjustment until the next remeasurement event. This is consistent with the broader ASC 842 principle that variable payments dependent on an index or rate are included at the initial rate without routine updates. Documentation of CPI-escalated lease accounting should note this treatment for clarity.
When a modification triggers remeasurement, lease classification must be reassessed under the five-criteria test from ASC 842-10-25-2 using the updated lease terms and current discount rate. The classification may change as a result. Of particular note, the fourth criterion — present value of payments substantially all of fair value — is sensitive to the discount rate. A higher current rate produces lower present value, potentially affecting whether this criterion is met. The third criterion — lease term major part of economic life — may also be affected by modifications changing the lease term. The classification reassessment should be performed for any modification that is not accounted for as a separate contract, with documented inputs and rationale. Classification changes have ongoing accounting effects: changing from operating to finance changes income statement presentation (separate amortization and interest vs single line lease expense) and changes the amortization pattern. Changing from finance to operating produces the reverse effects. The classification should be applied consistently from the remeasurement date forward.
Documentation supporting discount rate updates should address several elements. Trigger documentation: the specific event that triggered the remeasurement — modification details with effective date, reassessment of option exercise with the change in assessment and supporting basis, contingency resolution facts, or other trigger details. Current rate documentation: the current rate used at remeasurement with supporting basis — if IBR, the methodology applied including any credit spread analysis; if risk-free rate, the specific reference rate and its source; the remaining lease term used and basis for that determination. Calculation documentation: the recalculation of lease liability with updated payments and rate, the resulting adjustment to ROU asset, and the lease classification reassessment if applicable. Effect documentation: the impact on lease balances (lease liability and ROU asset), expense recognition pattern, and any reclassification effects. Approval documentation: review and approval of the remeasurement by appropriate accounting personnel, with documented segregation between preparer and reviewer. Timing documentation: the date the trigger occurred, the date the remeasurement was performed, and the period in which the impact was recognized. Documentation should be created contemporaneously with the remeasurement.
LeaseCommand supports remeasurement workflow through several integrated capabilities. Modification workflow provides structured workflow for processing modifications and reassessments including identification of remeasurement triggers and calculation of resulting adjustments. Rate management tracks discount rates used at commencement and updates at each remeasurement event, supporting consistent methodology application. Updated amortization generates revised amortization schedules following remeasurement, applying the new rate and updated lease terms. Documentation captures remeasurement triggers, current rate used, methodology, and calculations supporting audit defense. Classification reassessment workflow supports reassessing the five-criteria test under updated terms with documented inputs and rationale. ERP integration with Oracle NetSuite, Sage Intacct, Restaurant365, and QuickBooks Online provides journal entry sync for remeasurement adjustments. Complete audit trail of modifications, remeasurements, and rate updates supports external audit walkthroughs. The combined infrastructure produces consistent, defensible discount rate updates at triggering events. Specific accounting judgments — whether an event triggers remeasurement, the appropriate current rate methodology — should be addressed with accounting advisers; the platform handles the recording and tracking of conclusions reached.
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Legal & Accounting Disclaimer
The information on this page is provided for general informational purposes only and does not constitute legal, accounting, tax, or financial reporting advice. ASC 842, IFRS 16, GASB 87, and related lease accounting standards are complex and require interpretation specific to your organization’s facts and circumstances. Always consult qualified accounting professionals, your external auditors, and legal counsel before making decisions about lease classification, discount rate selection, disclosure, or financial reporting. LeaseCommand is a software platform — not an accounting firm or law firm. All figures, examples, and interpretations referenced are illustrative only.
