diff --git a/av1/encoder/encode_strategy.c b/av1/encoder/encode_strategy.c
index db0e281..85f2f95 100644
--- a/av1/encoder/encode_strategy.c
+++ b/av1/encoder/encode_strategy.c
@@ -1361,6 +1361,35 @@
     }
     frame_params.show_existing_frame &= allow_show_existing(cpi, *frame_flags);
 
+    // Special handling to reset 'show_existing_frame' in case of dropped
+    // frames.
+    if (oxcf->rc_cfg.drop_frames_water_mark &&
+        (gf_group->update_type[cpi->gf_frame_index] == OVERLAY_UPDATE ||
+         gf_group->update_type[cpi->gf_frame_index] == INTNL_OVERLAY_UPDATE)) {
+      // During the encode of an OVERLAY_UPDATE/INTNL_OVERLAY_UPDATE frame, loop
+      // over the gf group to check if the corresponding
+      // ARF_UPDATE/INTNL_ARF_UPDATE frame was dropped.
+      int cur_disp_idx = gf_group->display_idx[cpi->gf_frame_index];
+      for (int idx = 0; idx < cpi->gf_frame_index; idx++) {
+        if (cur_disp_idx == gf_group->display_idx[idx]) {
+          assert(IMPLIES(
+              gf_group->update_type[cpi->gf_frame_index] == OVERLAY_UPDATE,
+              gf_group->update_type[idx] == ARF_UPDATE));
+          assert(IMPLIES(gf_group->update_type[cpi->gf_frame_index] ==
+                             INTNL_OVERLAY_UPDATE,
+                         gf_group->update_type[idx] == INTNL_ARF_UPDATE));
+          // Reset show_existing_frame and set cpi->is_dropped_frame to true if
+          // the frame was dropped during its first encode.
+          if (gf_group->is_frame_dropped[idx]) {
+            frame_params.show_existing_frame = 0;
+            assert(!cpi->is_dropped_frame);
+            cpi->is_dropped_frame = true;
+          }
+          break;
+        }
+      }
+    }
+
     // Reset show_existing_alt_ref decision to 0 after it is used.
     if (gf_group->update_type[cpi->gf_frame_index] == OVERLAY_UPDATE) {
       cpi->ppi->show_existing_alt_ref = 0;
diff --git a/av1/encoder/encoder.c b/av1/encoder/encoder.c
index 27ae1d0..f2c2483 100644
--- a/av1/encoder/encoder.c
+++ b/av1/encoder/encoder.c
@@ -3728,12 +3728,20 @@
   // Never drop on key frame.
   if (has_no_stats_stage(cpi) && oxcf->rc_cfg.mode == AOM_CBR &&
       current_frame->frame_type != KEY_FRAME) {
+    FRAME_UPDATE_TYPE update_type =
+        cpi->ppi->gf_group.update_type[cpi->gf_frame_index];
+    (void)update_type;
+    assert(
+        IMPLIES(cpi->is_dropped_frame, (update_type == OVERLAY_UPDATE ||
+                                        update_type == INTNL_OVERLAY_UPDATE)));
     if (av1_rc_drop_frame(cpi)) {
+      cpi->is_dropped_frame = true;
+    }
+    if (cpi->is_dropped_frame) {
       av1_setup_frame_size(cpi);
       av1_set_mv_search_params(cpi);
       av1_rc_postencode_update_drop_frame(cpi);
       release_scaled_references(cpi);
-      cpi->is_dropped_frame = true;
       cpi->ppi->gf_group.is_frame_dropped[cpi->gf_frame_index] = true;
       // A dropped frame might not be shown but it always takes a slot in the gf
       // group. Therefore, even when it is not shown, we still need to update