Managing CPI-linked lease adjustments and contract modifications under IFRS 16

This article examines an important IFRS 16 challenge: What’s the best approach for handling CPI-linked lease adjustments and contract modifications under IFRS 16 to ensure accurate remeasurement?

CFOs face this question every reporting cycle. The right process can make the difference between precise, compliant reporting and a stressful close.

Summary

• CPI-linked adjustments must trigger timely remeasurement using the original discount rate.
  
  
• Contract modifications require assessment of scope and pricing to decide if they form a new lease or a remeasurement.
  
  
• Accurate remeasurement depends on consistent processes and clear documentation.
  
  
• Automation reduces risk, saves time, and supports audit readiness.
  
  
• With the right system, CFOs can achieve both accuracy and control.

Why CPI-linked lease adjustments are critical under IFRS 16

IFRS 16 turned lease management into an active process. Each time rent changes — whether from an inflation-linked clause or a contractual renegotiation — the lease liability and right-of-use (ROU) asset must be updated. These changes can significantly affect balance sheets, EBITDA, and loan covenants, especially in times of high inflation.

Getting these updates right ensures that your financial statements reflect economic reality. It also gives CFOs confidence that their lease portfolio is under control.

Automation platforms such as House of Control’s IFRS 16 software are designed to make that process consistent, compliant, and audit-ready.

Understanding IFRS 16 requirements for remeasurement

Under IFRS 16.42, a lessee must remeasure the lease liability whenever future lease payments change because of an index or a rate. This remeasurement occurs on the effective date of the change — not when the new index is announced.

Remeasurement ensures the liability reflects the latest expected cash flows. The updated liability is offset against the ROU asset, keeping the balance sheet aligned without creating immediate profit or loss effects.

Importantly, changes that arise from clauses already written into the lease – such as CPI indexation – are not contract modifications, but part of the original terms. As clarified in IFRB 2020-05, such updates trigger remeasurement within the existing lease.

CPI-linked lease adjustments: Common challenges and an effective approach

Annual CPI increases often affect dozens or hundreds of leases at once. Errors in timing, discount rates, or data input can distort liabilities and ROU assets. Without automation, finance teams spend valuable hours reconciling changes that could be handled automatically.

A structured, five-step process ensures accuracy:

1. Identify the effective date: The remeasurement is based on when the new rent takes effect.
   
   
2. Update payment schedules: Adjust remaining lease payments according to the revised CPI-linked amounts.
   
   
3. Remeasure the liability: Calculate the present value of the remaining payments using the original discount rate (incremental borrowing rate, IBR).
   
   
4. Adjust the ROU asset: Increase or decrease the asset by the same amount as the liability.
   
   
5. Continue depreciation and interest recognition: Reflect the updated values in the following reporting periods.

Example: A lease with €1 million annual rent rises 3 % after a CPI update. The liability and ROU asset both increase by the discounted value of the €30 000 annual increase. The income statement impact occurs gradually through higher depreciation and interest, not as a one-off adjustment.

Managing contract modifications under IFRS 16

Not all changes are CPI-related. True contract modifications occur when the underlying terms of the lease change. For example, extending the lease term, reducing space, or agreeing on new rent levels outside the original contract.

According to IFRS 16.44–46, the lessee must first determine whether the change is:

• A separate lease: If the modification adds one or more assets and the rent increases proportionately to market rates.
  
  
• … Or an adjustment to the existing lease: If not, meaning a remeasurement of the existing liability using a new discount rate as of the modification date.

When scope decreases, for example, if a company returns part of its rented space. Then both the liability and ROU asset are reduced proportionally. Any difference between the two amounts is recognised immediately in profit or loss. This process is described in detail in IFRS 16 In Practice 2023/24.

Ensuring accurate remeasurement across entities and reporting periods

For groups operating across multiple entities and currencies, consistent remeasurement is essential. To maintain accuracy the reports we have researched all give the following advice:

• Align accounting policies and discount rate methodologies group-wide.
  
  
• Ensure each subsidiary uses the correct functional currency and applies IAS 21 for translation at consolidation.
  
  
• Standardise timing for CPI updates and modification assessments so that remeasurements occur uniformly across reporting cycles.

A centralised IFRS 16 platform makes these steps simpler, enforcing group policy while allowing local flexibility. The result is faster consolidation and fewer audit adjustments.

Technology and process solutions for CPI-linked and modified leases

Manual spreadsheet models rarely cope well with the complexity of CPI-linked updates and contract modifications. Automation delivers three clear advantages:

• Precision: Calculations are based on embedded IFRS 16 logic, minimising human error.
  
  
• Speed: Lease updates flow automatically into financial statements.
  
  
• Traceability: Every remeasurement is documented with a full audit trail.

House of Control’s IFRS 16 lease accounting solution automates CPI adjustments, manages discount rate updates for modifications, and integrates seamlessly with consolidation tools.

Best practices for consistent IFRS 16 remeasurement

1. Centralise all lease data in a single system for easy tracking of CPI clauses and amendments.
   
   
2. Create a remeasurement calendar that matches CPI update cycles.
   
   
3. Define internal criteria distinguishing CPI adjustments from contract modifications.
   
   
4. Keep discount rate policies up to date, involving treasury whenever leases are modified.
   
   
5. Document every judgment to ensure audit transparency and knowledge continuity.

Key takeaways

• Remeasure CPI-linked leases when index changes take effect, not before.
  
  
• Use the original discount rate for CPI updates and a new rate for true modifications.
  
  
• Treat contract modifications as separate leases only when scope and price are proportionate.
  
  
• Align remeasurement policies across entities to ensure consistent consolidation.
  
  
• Automate calculations to increase accuracy, efficiency, and audit confidence.

Conclusion: The best approach to accurate IFRS 16 remeasurement of CPI-linked and modified leases

The best approach combines clear interpretation, disciplined process, and smart automation. By distinguishing between CPI-triggered remeasurements and true contract modifications, CFOs can maintain reliable IFRS 16 balances across entities and reporting periods. 

With the right tools and structure, you can efficiently update your lease terms. Smart tools can also help your compliance approach become more than a box-ticking exercise. It can be a foundation for transparency and control, which is exactly what finance leaders need to make better decisions, every reporting cycle.