Remeasurement is the re-derivation of a balance already on the books from updated inputs, rather than the recognition of anything new. US accounting uses the word for at least two unrelated mechanics, converting a set of books into the entity’s functional currency and recalculating a lessee’s lease liability when the payments change, and the two share nothing except the name.
Which one is meant is settled by the balance being discussed, so a workpaper that says only remeasurement has not said anything yet.
Remeasurement in Foreign Currency
Here the word names a conversion done before anything else. If an entity’s books of record are not maintained in its functional currency, remeasurement into the functional currency is required, and that remeasurement is required before translation into the reporting currency. The remeasurement process is intended to produce the same result as if the entity’s books of record had been maintained in the functional currency, and where a foreign entity’s functional currency is the reporting currency, remeasurement into the reporting currency obviates translation (FASB Statement No. 52, paragraph 10). Which accounts are converted at historical rates and which at the current rate, and where the resulting gains and losses land, are set out in monetary asset.
Remeasurement and translation are different steps with different destinations, which is the distinction most of the confusion around this word actually turns on. Remeasurement runs its differences through income. Translation of a foreign entity’s statements into the reporting currency does not: those translation adjustments are excluded from net income and are reported separately and accumulated in a separate component of equity (FASB Statement No. 52, paragraph 13), a route worked through in revaluation.
So the order matters and so does the destination. Books to functional currency is remeasurement and hits earnings; functional currency to reporting currency is translation and does not.
Remeasurement of a Lease Liability
The lease sense has nothing to do with currency. It is a recalculation of a lessee’s own liability, and the standard lists exactly when a lessee has to do one.
A lessee remeasures the lease payments if the lease is modified and the modification is not accounted for as a separate contract; if a contingency on which some or all of the variable lease payments are based is resolved such that those payments now meet the definition of lease payments; or if there is a change in the lease term, in the assessment of whether the lessee is reasonably certain to exercise a purchase option, or in the amounts probable of being owed under a residual value guarantee (FASB Accounting Standards Update 2016-02, paragraph 842-10-35-4).
The contingency trigger is the one that catches a preparer mid-year. A payment linked to the performance or use of the underlying asset is variable and stays out of the liability, and the standard’s own example is an event that turns those payments into fixed payments for the remainder of the term (FASB Accounting Standards Update 2016-02, paragraph 842-10-35-4). Nothing about the contract changed. A condition inside it resolved, and the liability has to be rebuilt.
What the liability and the right-of-use asset are in the first place, and how each behaves between remeasurements, is in right-of-use asset.
The Discount Rate Usually Changes, and Sometimes It Does Not
This is the part of a lease remeasurement most likely to be done wrong, because the default and the exceptions point opposite ways.
Where there is a remeasurement of the lease liability, the lessee updates the discount rate for the lease at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments (FASB Accounting Standards Update 2016-02, paragraph 842-20-35-5). That is the rule, and it means a remeasurement in a different rate environment moves the liability for two reasons at once.
Three cases keep the original rate. A change in the lease term, or in the assessment of a purchase option, where the discount rate for the lease already reflects that the lessee has an option to extend or terminate or to purchase. A change in amounts probable of being owed under a residual value guarantee. And a change in the lease payments resulting from the resolution of a contingency on which variable payments were based (FASB Accounting Standards Update 2016-02, paragraph 842-20-35-5).
Read the exceptions together and the logic is consistent. Where the event was already priced into the rate, or where it changes only how much is owed rather than for how long, the rate stays. Where the shape of the term itself changes in a way the original rate never contemplated, the rate is rebuilt with it.
Remeasurement Is Not the Same as Modification
The two words get used interchangeably and the standard keeps them apart.
A modification is a change to the contract. It is accounted for as a separate contract when it grants the lessee an additional right of use not included in the original lease and the lease payments increase commensurate with the standalone price for that additional right of use, adjusted for the circumstances of the particular contract (FASB Accounting Standards Update 2016-02, paragraph 842-10-25-8). A modification that meets that test produces a new lease and no remeasurement of the old one.
A modification that fails the test does two things rather than one. It triggers a remeasurement of the lease payments (FASB Accounting Standards Update 2016-02, paragraph 842-10-35-4), and it is also the event that reopens the classification question, which is otherwise closed after commencement and is worked through in finance lease.
So modification is one route into remeasurement, and remeasurement has three other routes that involve no contract change at all.
Common Questions
Four things, and only one of them is a change to the paperwork: a modification that is not a separate contract, the resolution of a contingency that turns variable payments into lease payments, a change in the lease term or in the purchase option assessment, and a change in the amounts probable of being owed under a residual value guarantee (FASB Accounting Standards Update 2016-02, paragraph 842-10-35-4). A rise in market rents, a fall in the asset’s value and a change in the lessee’s credit are not on the list.
Remeasurement converts books that are not kept in the functional currency into that functional currency, and it comes first (FASB Statement No. 52, paragraph 10). Translation converts a foreign entity’s functional currency statements into the reporting currency, and its adjustments are excluded from net income and accumulated in a separate component of equity instead (FASB Statement No. 52, paragraph 13). One hits earnings, the other does not, and an entity can need both in the same consolidation.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own lease schedule and foreign currency work through a trial task before a client engagement depends on it.
