CPI-linked and market-review rent adjustments: lease liability remeasurement triggers

Hospitality leases commonly stack turnover rent, CPI escalation, and periodic market reviews in one contract, and each has a distinct remeasurement trigger under IFRS 16; forecasting future CPI into the initial liability, or treating every market review as a full lease reassessment, both misstate the lease liability and right-of-use asset and create volatility that does not reflect the standard's actual mechanics.

Does the lease contain a fixed-in-substance rent component linked to a CPI index, requiring remeasurement of the lease liability only when the index actually changes and affects future cash flows (not on a forecast or anticipated basis)? Is there a periodic market rent review clause, and once the reviewed rent is agreed or determined, does that event constitute a lease modification or an in-scope IFRS 16 reassessment rather than being ignored until the next payment date? Are turnover-based, CPI-indexed, and market-reviewed rent components within the same lease correctly separated and measured according to their own respective IFRS 16 requirements?

1. Decompose the lease's total rent into its distinct components: fixed base rent, CPI/index-linked escalation, periodic market-rent-review rent, and turnover/variable rent based on sales.
2. For pure turnover/variable rent with no minimum guaranteed floor tied to an index, exclude it from the lease liability entirely and expense it as incurred (it is a variable lease payment not based on an index or rate).
3. For CPI/index-linked rent, include it in the initial lease liability measurement using the index/rate as it stands AT COMMENCEMENT (do not forecast future CPI increases).
4. Remeasure the lease liability for CPI-linked rent ONLY when the cash flows actually change, i.e., when the periodic index adjustment takes effect and the new payment amount is known, discounting the revised payments using the discount rate applied at commencement (unchanged), unless the change results from a floating interest rate.
5. For market-rent-review clauses, monitor the contractual review date; when the new rent is determined/agreed following the review, remeasure the lease liability using the newly agreed payments.
6. Assess whether the market review, in substance, changes the lease term or scope (e.g., triggers a renewal option reassessment), if so, treat as requiring a revised discount rate; if the review is simply resetting the rent within the existing term/scope, remeasure consistent with the index-linked approach (using the rate/rent as newly set, without forecasting).
7. Recognize any lease liability remeasurement as a corresponding adjustment to the right-of-use asset (not P&L), unless the asset is already reduced to nil, in which case recognize the excess in profit or loss.
8. Separately monitor for other remeasurement triggers (lease modification, reassessed lease term, change in purchase option assessment) that are independent of the rent-adjustment mechanics above.

Measure the initial lease liability by discounting fixed and in-substance fixed payments (including CPI-linked payments measured using the index/rate at commencement) at the rate implicit in the lease, or the lessee's incremental borrowing rate if the implicit rate is not readily determinable. Exclude pure turnover-based variable rent from the liability; expense it as incurred against the period's actual sales. On a CPI adjustment taking effect, remeasure the liability as the present value of revised remaining payments using the original (unchanged) discount rate, and adjust the right-of-use asset by the same amount. On a market-rent-review outcome, remeasure similarly using the newly agreed rent; if the review is judged to modify the lease's scope/term, apply a revised discount rate at the reassessment date. Continue to depreciate the right-of-use asset over the remaining lease term following each remeasurement.

Disclose: nature and separation of lease payment components (fixed, CPI/index-linked, market-reviewable, turnover-based variable); the entity's policy on when each triggers lease liability remeasurement; variable lease payments not included in the lease liability and expensed as incurred, disclosed as required by IFRS 16 variable payment disclosures; amount of right-of-use asset and lease liability remeasurements recognized in the period, if material; maturity analysis of lease liabilities including the effect of significant leases with index/market-review features; significant judgments in assessing lease term and remeasurement triggers.

• Forecasting future CPI increases and building them into the initial lease liability measurement instead of using the rate/index prevailing at commencement
• failing to remeasure the lease liability when a CPI adjustment actually takes effect (leaving the liability stale)
• treating every market rent review as automatically requiring a full lease reassessment with a revised discount rate, even when the review does not otherwise modify the lease term or scope
• including pure turnover-based variable rent in the initial lease liability measurement (it should be excluded and expensed as incurred)
• recognizing the P&
• L impact of a remeasurement instead of adjusting the right-of-use asset (except where the asset is already at nil).