When the future CPI rates are not known, ASC 842 requires lessees to estimate the future CPI rates to account for the CPI increase in rent. The estimate should be based on the best available information, such as historical CPI trends or forecasts provided by credible sources.
To account for the CPI increase in rent under ASC 842 when the future CPI rates are not known, the lessee should follow these steps:
- Determine the current rent payment and the CPI adjustment factor based on the CPI rate at the lease commencement date.
- Estimate the future CPI rates over the lease term based on the best available information.
- Calculate the additional lease payments resulting from the estimated future CPI rates.
- Adjust the lease liability and right-of-use asset by the present value of the additional lease payments resulting from the estimated future CPI rates.
- Repeat the process each reporting period to reflect any changes in the estimated future CPI rates.
It’s important to note that the estimates used to account for the CPI increase in rent should be reassessed and updated as new information becomes available. Any changes in the estimates should be accounted for prospectively.
Is it a ASC 842 Modification when the estimated CPI rates are updated?
Under ASC 842, a change in the lease payment resulting from a CPI increase is not considered a lease modification if the lease agreement includes a clause that provides for such adjustments based on changes in the CPI. If the lease agreement includes such a clause, the lessee should account for the CPI increase in rent as a variable lease payment, and there is no need to reassess the lease classification or remeasure the lease liability and right-of-use asset.
However, if the lease agreement does not include a clause that provides for CPI adjustments, and the lessee and lessor agree to include such a clause in the lease agreement, then the CPI adjustment would be considered a lease modification. In this case, the lessee should reassess the lease classification and remeasure the lease liability and right-of-use asset based on the modified lease terms.
It’s important to note that any other changes to the lease agreement that are not related to the CPI adjustment, such as changes to the lease term, lease payment, or lease asset or liability, would also be considered a lease modification and would require reassessment of the lease classification and remeasurement of the lease liability and right-of-use asset.
It is important to note that the specific accounting under ASC 842 can vary depending on the details of the lease agreement and the specific circumstances of the company. Therefore, it is recommended to seek the advice of a qualified accountant or financial professional to ensure proper accounting treatment.