Testing lease modification and remeasurement accounting means first classifying what actually happened to a lease during the year — a contractual modification, a change in the lease term triggered by a reassessment of options, or a change in an index or rate that affects variable payments — because each one has a different Ind AS 116 mechanic, then independently recomputing the revised lease liability using the right discount rate for that event and tracing the resulting adjustment to the right-of-use asset.
Why classification has to come before recomputation
A modification that decreases the scope of a lease is accounted for partly as a termination; one that does not decrease scope is a remeasurement of the liability with a corresponding adjustment to the right-of-use asset; a reassessment of a renewal or termination option uses the discount rate at the date of reassessment, which may differ from the rate used for an index-linked payment change. Applying the wrong mechanic produces a liability and asset adjustment that happens to balance but is not actually right.
The testing sequence
- 01Obtain every lease amendment, side letter, and rent renegotiation executed or effective during the yearDo not rely on the lease register alone — walk the legal and property teams through what actually changed, since amendments are sometimes agreed informally before a formal addendum is signed.
- 02Classify each event as a modification, a reassessment, or an index/rate changeA modification changes the scope or consideration of the lease by agreement; a reassessment is a change in the entity's own judgement about an option it already held; an index or rate change is neither — it adjusts future variable payments without changing scope.
- 03For a modification that decreases scope, recompute the partial terminationDecrease the carrying amount of the right-of-use asset to reflect the partial or full termination, and recognise a gain or loss for the difference between that decrease and the proportionate decrease in the lease liability.
- 04For a modification that does not decrease scope, or for a reassessment, recompute the lease liability using a revised discount rateThe discount rate is updated at the date of the event, reflecting current market rates for the remaining term — the original rate is not simply carried forward, which is the most common computational error in this test.
- 05Trace the corresponding adjustment to the right-of-use assetThe change in the lease liability from the remeasurement is added to or deducted from the right-of-use asset, not taken to profit or loss, except where the asset's carrying amount would go negative, in which case the excess is expensed.
- 06For index or rate-driven changes in variable payments, confirm remeasurement only occurred when the cash flows actually changedRemeasurement for an index-linked payment happens when the adjustment to cash flows takes effect, using the rate prevailing at that date, not at the point the index movement first became known.
- 07Reperform the amortisation and interest schedule going forward from the remeasurement dateConfirm depreciation on the right-of-use asset and interest on the liability for the remainder of the year were computed from the revised balances and the revised term, not the original schedule.
| Event | Mechanic | Discount rate used |
|---|---|---|
| Modification decreasing scope | Partial termination — gain/loss recognised | Not applicable to the terminated portion |
| Modification not decreasing scope | Remeasure liability, adjust right-of-use asset | Revised rate at the modification date |
| Reassessment of renewal/termination option | Remeasure liability, adjust right-of-use asset | Revised rate at the reassessment date |
| Change in index/rate affecting variable payments | Remeasure liability, adjust right-of-use asset | Unchanged discount rate, applied to revised cash flows |
Regulatory requirement
Ind AS 116 sets out the distinct accounting for lease modifications, reassessments and changes in index-linked payments, including when the discount rate is revised. Verify the current text before concluding.
How we think about this
Once an event is correctly classified, the liability recomputation and the resulting right-of-use adjustment are fully mechanical and should be reperformed from the lease terms, not taken from the client's schedule. Classifying the event itself — modification, reassessment, or index change — is the judgement call, and it is the one that decides which mechanic, and which discount rate, actually applies.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexLease accounting audit under Ind AS 116: what changedHow the right-of-use asset and lease liability are recognised, testing the discount rate and lease term, the exemptions that still exist, and the errors that recur most often.
- Audit data & extractsTrial balance mapping for audit softwareMapping a client's idiosyncratic ledgers to a standard chart of accounts is the step that decides whether analytics and disclosures work at all, and the one most firms rush.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
- Fixed assets & capexFixed asset register audit: completeness and accuracy checksWhat a fixed asset register must contain, how to tie it to the general ledger, and the gaps that quietly survive year after year if nobody checks for them.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.