IFRS 16 - Early Purchase Option

[Ketan Marwah]

Hi, I wanted to seek an opinion on how to treat a case where an early purchase option is exercised in a lease agreement i.e. whether as a re-measurement or modification of lease. Our company has two purchase options in the contract i.e. to exercise the purchase option in Aug 2023 or Aug 2028. In our initial assessment i.e. at inception we assessed that we would exercise the purchase option at the end of Aug 2028 and accordingly built the lease term but we would now like to proceed with the early purchase option i.e. available in Aug 2023 resulting in shortening of the lease term. Would this get treated as a lease modification or a re-measurement? I am inclined to treat this as a lease modification because a re-measurement under IFRS 16.20 requires a reassessment of the option from the angle that whether it is a reasonably certain to exercise the option or not but not as preponement of the option as such. Looking forward to hearing from you. Many thanks.

[Marek Muc]

I don't see any modification in your scenario - all contractual terms remain the same, don't they?

A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease

Also, I don't understand what you mean by:

IFRS 16.20 requires a reassessment of the option from the angle that whether it is a reasonably certain to exercise the option or not but not as preponement of the option as such.

[Ketan Marwah]

Hi Marek, Thanks for your response. All contractual terms remains same but we are exercising the purchase option earlier (in Aug 2023) than originally anticipated (in Aug 2028) resulting in reducing the lease term by 5 years. I took the reference of IFRS 16.20 (b) to understand the meaning of reassessment of option clearly. From my reading of the para, it appears as if it is an either/or situation where either the lessee is reasonably certain to exercise an option
not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term (as described in paragraph B41). In my specific case we are not reassessing the option as such (as we would exercise the purchase option anyhow) but the timing of the exercise of option is reassessed by using the option earlier in Aug 2023 leading to a revision of lease term.

[Marek Muc]

not sure why you're making this so complicated...
originally your assessment was that you will not exercise the Aug'2023 option, now that assessment has changed and you need to remeasure lease liability and RoU asset
https://ifrscommunity.com/knowledge-bas ... -liability