I am wondering if anyone has seen common terms in lease agreements where the lease extension price is not actually defined and instead states that the price will be negotiated at the time of renewal/extension? I am unclear on how this should be accounted for. Would one assume that the lease liability should include amounts at least as much as the payments at the end of the current lease term for the extension period (making an assumption that the payments in the extension term will be at least as much as they are at the end of the term - as lessor is unlikely to decrease rent in the future, although it would be nice if they did ). Or, should nothing be accrued in the lease liability for an extension period if the dollar amount is unknown/negotiable? I couldn't find anything in the standard that talks about this as all examples always define the extension/renewal price.
Hi,
I think if the conditions mentioned in IFRS 16 related to lease term inclusion are met (para 18-21 & B34-B41)then u have to add that period in ur lease term. U will assume the last rate as possible rent payment for the extended period & once u will finalize your new payments terms, will adjust your lease schedule accordingly. i.e. by adjusting right of use asset & lease liability prospectively.
Yes, that's the approach I have taken so far. I have used the lease cost in the last applicable period and then when the future rate is negotiated, would modify the lease payments at that time through adjustment using the normal modification approach as you mentioned. Cheers.
So you think that this kind of extension options are enforceable? i.e. they can be exercised by a lessee without any consent by the lessor?
As I see it, if the price is not agreed, such an option is not enforceable, as you de facto need a consent by the lessor, as the price is a crucial factor here
I would say it is enforceable as they (the lessor) have given the extension option in the contract with a set time period, only that rent will be negotiated based on "fair market rent" closer to the time of entering into the extension. I think the auditor will have the same opinion but we will see
You could be right, I'm not 100% sure on it but I'm hoping our auditors preliminary review will provide some clarity as we likely will have to take it as gospel haha... However, I thought enforceability was in relation to termination clauses? Off the top of my head I thought that if either party to the lease can terminate the lease unilaterally, or without the consent of the other party, and there are no significant penalties, then the contract is no longer enforceable. There is no clause like this, they have offered the extension period just without a defined rental amount, as the amount will be determined closer to that time if we were to extend. Could you steer me towards the specific part of the standard that you think would break the enforceability requirement? Help greatly appreciated!
). Or, should nothing be accrued in the lease liability for an extension period if the dollar amount is unknown/negotiable? I couldn't find anything in the standard that talks about this as all examples always define the extension/renewal price.
