FRS 102 lease modifications under Section 20: What triggers a remeasurement

For a finance controller preparing month-end close or responding to an auditor's query on lease changes, the first question is always the same: is this a modification or a reassessment? Under FRS 102 Section 20, a modification is any change to the scope of a lease or the consideration payable that was not part of the original terms. A reassessment, by contrast, is a revision of a judgement already made, triggered by a change in circumstances rather than a new agreement. Both require LOIS to recalculate the lease liability and right-of-use asset using updated inputs, and both require a documented rationale for auditors.

Updated June 2026. This guide covers FRS 102 Section 20 as amended effective for accounting periods beginning on or after 1 January 2026. For a December balance date, the transition will need to have taken place by December 2026.

This guide addresses modifications and reassessments specifically. For the initial measurement of a lease liability and right-of-use asset, see FRS 102 lease liability: a plain-English guide and what is a right-of-use asset? For a full transition checklist, see FRS 102 Section 20 transition guide: a step-by-step checklist.

Modifications vs reassessments: what FRS 102 Section 20 distinguishes

FRS 102 Section 20 draws a clear line between two types of recalculation event. A modification arises from a change agreed with the lessor that was not contemplated in the original contract. A reassessment arises from a lessee re-evaluating a judgement already made at commencement, prompted by facts that have materially changed. Both result in a revised lease liability, but the discount rate treatment and the accounting mechanics differ between them.

The practical test is: did this happen because the lessee and lessor agreed something new, or because circumstances changed in a way that affects a prior judgement? The first is a modification. The second is a reassessment. A CPI rent review sits in a third category: it is a remeasurement triggered by an index or rate change taking effect, treated as a reassessment of variable payments rather than a modification of the contract itself.

This distinction matters because FRS 102 specifies different discount rate treatments for each. A modification generally requires the lessee to use the Obtainable Borrowing Rate (OBR) at the modification date. A reassessment of an option typically uses the original discount rate. The FRS 102 guide on determining the OBR explains how to document the rate and what auditors will ask.

Events that trigger a modification

Under FRS 102 Section 20, a modification must be accounted for when the lessee and lessor agree to change the contractual scope of, or the consideration for, a lease. LOIS identifies five modification events that finance teams in the UK and Republic of Ireland encounter most frequently in practice, all of which require a remeasurement of the lease liability using the OBR at the modification date.

• Extension of lease term by agreement. The lessee and lessor agree to extend the lease beyond its original expiry. This is the most common modification. The modified lease term is used to recalculate the liability at the modification date using the revised OBR. If the extension grants a right to use an additional underlying asset not covered by the original lease, it is treated as a separate new lease rather than a modification of the existing one.
• Reduction in scope (part-termination). The lessee hands back part of the leased asset before the lease ends, for example returning one floor of a multi-floor building. The portion of the right-of-use asset and lease liability relating to the surrendered scope is derecognised, and any difference is recognised as a gain or loss in the income statement at the modification date.
• Addition of new assets to an existing lease. Where the lessor adds new assets to a lease at a price that is not commensurate with the standalone price (for example, adding a second vehicle at a subsidised rate), this is treated as a modification of the original lease rather than a new contract.
• Change in fixed payments by agreement. The lessee and lessor agree to permanently change the contracted payment amounts, for example renegotiating rent downward in exchange for a lease extension. The revised payment schedule is discounted at the OBR at the modification date to arrive at the new liability.
• CPI or RPI review date. Rent reviews linked to an index or rate are not modifications in the strict sense; they are reassessments of a variable payment that has crystallised. The remeasurement is triggered at the date the new payments take effect, not at the announcement date. Processing this as a modification (and entering a new lease) is one of the most common errors in practice.

Events that trigger a reassessment

A reassessment under FRS 102 Section 20 arises when a lessee must reconsider a judgement made at commencement because facts have materially changed. No new agreement with the lessor is required. Three reassessment events arise most commonly for UK and Irish organisations reporting under FRS 102, each requiring an updated lease liability calculation, with the original discount rate applied to option reassessments.

• A significant event changes the likelihood of exercising an extension option. If the lessee initially assessed an extension option as not reasonably certain to be exercised, but circumstances change, the lease term must be revised to include the extension period. A common example: a retailer makes a substantial fit-out investment in premises with a five-year lease and a five-year extension option. The investment makes early exit commercially irrational, so the option is now reasonably certain and the lease term must be extended in the accounting records.
• Lessee's intention changes on a termination option. If a lessee originally planned to exercise a break clause and priced this into the lease term, but has since decided to continue, the remaining lease term must be extended to reflect the decision not to terminate. The original discount rate is used for this reassessment.
• An index or rate update becomes effective. When a CPI or RPI-linked rent review takes effect, the lessee remeasures the lease liability using the revised payment amount. The remeasurement uses the OBR at the date of the adjustment. This is not a modification because the payment structure was always index-linked; the contract itself has not changed.

The distinction between using the original rate and the revised OBR matters in practice. For option reassessments, using a revised rate when the standard requires the original rate will produce an incorrect liability balance and, in turn, incorrect journals. Where there is ambiguity about which event has occurred, the rationale recorded in the system at the time of the entry is the evidence auditors will rely on.

How to process the accounting entries: a worked example

When a modification triggers a remeasurement, LOIS processes two mechanical steps: recalculate the lease liability as the present value of revised future payments at the OBR at the modification date, then recognise the difference between the old carrying amount and the new liability as an adjustment to the right-of-use asset. No gain or loss enters the income statement for a standard scope-neutral modification.

Scenario. A five-year lease commenced at an OBR of 5.0%, with annual payments of £30,000 payable at the end of each year. Two years in, the lessee and lessor agree to extend the lease by a further two years (five remaining years in total from the modification date). The revised OBR at the modification date is 5.5%. Annual payments remain £30,000 throughout.

Step 1: determine the carrying amount immediately before modification. With three years remaining on the original lease, the carrying amount of the liability at the modification date is approximately £81,697, being the present value of three £30,000 payments at the original OBR of 5.0%.

Step 2: recalculate the liability at the revised OBR. The modified lease now runs for five years from the modification date. At an OBR of 5.5%, the present value of five annual payments of £30,000 is £128,111.

Step 3: calculate the adjustment. The new liability of £128,111 exceeds the pre-modification carrying amount of £81,697 by £46,414. This difference is the modification adjustment.

Step 4: post the journal entry.

From the modification date, the liability continues to unwind on the new amortisation schedule at 5.5%. Depreciation of the ROU asset also restarts using the new carrying amount of the asset and the revised remaining useful life. Once the modification is entered, LOIS can action for the monthly journals to reflect these updated schedules.

For a scope reduction (part-termination), the mechanics differ. The proportion of the ROU asset and lease liability relating to the surrendered scope is derecognised, and the difference between the proportionate liability reduction and the proportionate ROU asset carrying amount is recognised as a gain or loss in the income statement.

Common errors in practice

Most FRS 102 modification errors come from a small number of recurring misapplications that LOIS's CA-qualified experts see across UK and Irish portfolios. Identifying them at the point of entry is far less costly than correcting them when an auditor raises a query at year end.

Maintaining the audit trail

LOIS records every modification and reassessment event with a timestamp, stores the rationale entered by the user at the time of the change, recalculates the lease liability and ROU asset automatically using the updated inputs, and generates revised journal entries ready for posting. Every step in the chain, from the triggering event to the updated amortisation schedule, is visible to auditors without requiring a manual reconstruction.

This matters because auditors reviewing FRS 102 compliance will specifically test whether modifications were identified promptly, whether the correct accounting treatment was applied, and whether the discount rate used is appropriate and documented. A spreadsheet-based process makes all three of those tests harder. The team has to locate the modification in a change log, confirm the rate applied, and reconcile the recalculated liability back to the general ledger.

For organisations with large property portfolios, where lease events happen continuously, managing this manually across periods is one of the primary sources of close overruns and audit adjustments. LOIS is built to handle the full cycle: initial recognition, ongoing amortisation, modification, reassessment, and final derecognition, with a complete audit trail at every stage.

For a deeper look at ROU asset initial measurement and the IFRS 16 comparison, see What is a right-of-use asset? A plain-English IFRS 16 guide.

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