CPI adjustments under IFRS 16: How the accounting actually works

It is March. Your property team sends an email confirming that rent on 40 leases has just increased by CPI, effective from the start of the month. For most of those leases, the new annual rent is somewhere between 3 and 5 percent higher. The question sitting in front of you is: what happens now in the accounts? Under IFRS 16 and its Australian equivalent AASB 16, a CPI-linked rent increase is not just a cash flow change; it triggers a remeasurement of the lease liability and a corresponding adjustment to the right-of-use (ROU) asset. This guide explains the standard's requirements, the calculation steps, and where finance teams most often go wrong.

Updated May 2026.

What IFRS 16 says about index-linked lease payments

Under IFRS 16, lease payments linked to an index such as CPI are treated as variable payments included in the lease liability, but only to the extent of the index at commencement. Paragraph 28 of IFRS 16 is clear: when measuring the lease liability at inception, a lessee includes variable payments that depend on an index or rate, using the index or rate at the commencement date. Future changes to that index are not anticipated; they are dealt with later, when they actually take effect.

Paragraph 42(b) then picks up the ongoing treatment. It requires the lessee to remeasure the lease liability "when there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments." The critical phrase follows: "the lessee shall remeasure the lease liability to reflect those revised lease payments only when there is a change in the cash flows, i.e. when the adjustment to the lease payments takes effect." This is the timing rule. The standard is deliberate: no remeasurement on announcement, only on the effective date of the new payment amount.

Paragraph 45 completes the picture by prescribing the discount rate. When remeasuring under paragraph 42(b) for an index or rate change, the lessee uses an unchanged discount rate: the same incremental borrowing rate (IBR) applied at the commencement date (or at the last modification, if one has since occurred). A revised discount rate is only required when the change in payments results from a change in a floating interest rate, not from a CPI movement. This distinction matters in practice and is discussed further below.

When remeasurement is triggered: the distinction that matters

IFRS 16 paragraph 42(b) draws a clear line between two moments: the moment a CPI change is known, and the moment it actually changes your lease payments. Only the second moment triggers a remeasurement. This catches many finance teams off-guard, because the CPI figure is published well before the new rent takes effect.

Take a common ANZ example. In Australia, the ABS publishes CPI data monthly (transitioning from quarterly since November 2025), with quarterly data still produced for the March, June, September, and December reference periods. Many commercial property leases in Australia reference the annual movement in the March or September quarter CPI. Stats NZ publishes CPI quarterly, approximately 12 working days after the end of each reference quarter, so March quarter data typically lands in mid-April and September quarter data in mid-October. The rent review clause in a lease will specify which index and which reference period applies, and the date the new rent takes effect, commonly 1 April or 1 October for leases referencing the March and September quarters respectively.

This means a finance team may receive the new CPI figure and the property team's notification in, say, April, but if the new rent is not effective until 1 July, the remeasurement date is 1 July, not April. Processing the adjustment early is a timing error that overstates the lease liability in one period and creates a reconciliation headache in the next. The rule is simple: remeasure on the date the new payment amount first becomes payable.

The remeasurement calculation: step by step

When the effective date arrives, the remeasurement follows a defined sequence. At the remeasurement date, the carrying amount of the lease liability is the present value of remaining lease payments at the original IBR, which is where the running amortisation schedule sits. The remeasurement recalculates that present value using the new, higher (or lower) lease payments, still discounted at the original IBR. The difference between the new present value and the carrying amount is the adjustment, which flows to the ROU asset with no P&L impact.

• Step 1: Confirm the effective date. This is when the new CPI-adjusted payment first becomes payable. Do not remeasure earlier.
• Step 2: Calculate the new lease payment. Apply the CPI percentage to the current contractual rent. If the lease clause specifies the calculation method (e.g. a floor or cap on increases), apply that formula.
• Step 3: Determine the remaining lease term. Count the number of periods remaining from the effective date to the end of the lease term (including extension options already assessed as reasonably certain).
• Step 4: Recalculate the present value. Discount the revised future lease payments at the original IBR; do not update the discount rate for current market conditions.
• Step 5: Calculate the adjustment. The difference between the new present value and the carrying amount of the lease liability is the adjustment amount.
• Step 6: Post the journal entries and update the amortisation schedule. Both the lease liability and the ROU asset are adjusted. The amortisation schedule must then reflect the higher payments going forward, and the ROU asset depreciation charge should be recalculated based on the new carrying value and the remaining lease term.

Worked example: $100k lease with 4.2% CPI increase

Here is a worked example using the numbers from the brief above. A company holds a 7-year property lease that commenced two years ago. The lease includes an annual CPI review, effective 1 April each year. The original annual rent was $100,000 (paid monthly at $8,333), and the IBR applied at commencement was 5.3% per annum. As at 1 April, CPI for the relevant reference period was 4.2%, making the new annual rent $104,200 (monthly: $8,683).

With two years elapsed, 60 months remain on the lease. The monthly IBR equivalent of 5.3% per annum is approximately 0.431% per month.

The present value figures above use a monthly rate of 0.431% (the effective monthly equivalent of 5.3% per annum). These are rounded for illustration. The actual figures will vary slightly depending on whether payments fall at the beginning or end of each month, and whether exact IBR conversion uses a nominal or effective approach.

The journal entries

On the effective date of the CPI adjustment, a single remeasurement journal is posted. The $18,400 increase in the present value of future lease payments is recognised as an increase to both the lease liability and the ROU asset, with no impact through the income statement. The adjustment is purely a balance sheet entry.