Lease agreements can be complex, often including multiple renewal and termination clauses. Although determining the lease term is nothing new, it takes on a new significance under IFRS 16 Leases.
Practical guidance on this critical estimate
Lease term is now a critical estimate – affecting the size of the lease liability for a lessee and the lease classification for a lessor.
Our publication Lease term – How long is the lease? (PDF 1.7 MB) contains practical guidance and examples showing how to determine the lease term when the lease commences and when to reassess it.
Companies to consider the broader economics of lease contracts
The new guidance on lease term has proved controversial. After being asked to consider this guidance, in December 2019 the IFRS Interpretations Committee concluded that when determining the lease term, a company always considers the broader economics of a contract – not just the narrow contractual terms.
The Committee's agenda decision will provide food for thought for many companies and could drive a change in accounting policy for some.
Financial statement volatility
IFRS 16 requires companies to reassess the lease term during the life of a lease contract in specific circumstances. This requirement and that to reassess other key estimates and judgements if the lease term changes, introduces financial statement volatility.
This could be a key practical issue at present, as companies take action to respond to the COVID-19 pandemic.
Find out more
Read our publication Lease term – How long is the lease? (PDF 1.7 MB) and further in-depth application guidance on IFRS 16 in our Leases handbook.
As well as practical guidance and examples, Lease term – How long is the lease? (PDF 1.7 MB) discusses how to navigate the links between written contracts, laws and regulations and penalties, and covers some practical application issues and key disclosures.
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