Lease term
Assess reasonable certainty using relevant facts and circumstances that create an economic incentive to exercise an extension option or not exercise a termination option. The term affects measurement of the lease liability and right-of-use asset. Reassess when required by IFRS 16, including when a significant event or change in circumstances within the lessee’s control affects the assessment. Enforceability determines the outer boundary.
Worked example
A lease is non-cancellable for five years and gives the lessee an option to extend for three more years. If the lessee is reasonably certain to extend and the extension is enforceable, the lease term is eight years.
Common mistake
Adding every optional extension automatically or omitting an option that the lessee is reasonably certain to exercise.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |