The Board discussed lease contracts that give the lessee an option to extend the lease for an additional period or an option to terminate the lease early.
The Board discussed some of the factors that affect whether a lessee will exercise an option to extend or terminate the lease, and considered whether it is possible to view a lease with an option to extend as equivalent to a longer-term lease with an option to terminate. The Board then analysed the rights and obligations that arise under a simple lease that includes an option to extend the lease term and discussed whether those rights and obligations meet the Framework�s definitions of assets and liabilities.
The Board also discussed four possible approaches to accounting for leases that include a lessee option to extend or terminate:
The lessee obtains the right to use until the option exercise date, and an option to extend the lease.
- The lessee obtains a right to use for the period of the lease including any possible extensions, and an option to terminate the lease.
- The lessee obtains a right to use either for the period of the lease or until the option exercise date. The assets and liabilities recognised are based on the most probable lease term. Options are not separately recognised.
- The lessee obtains a right of use whose measurement is based on the probability-weighted value of the payments under the two possible outcomes of the lease. Options are not separately recognised.
The discussion was for education purposes only. No decisions were made.