Extension Options
Related terms
Category
IFRS 16
Extension options (or renewal options) are provisions in a lease contract that give the lessee the right to extend the lease term beyond the initial non-cancellable period. Under ASC 842 and IFRS 16, periods covered by extension options are included in the lease term when the lessee is reasonably certain to exercise them.
Why it matters
Extension options significantly affect the lease liability and ROU asset. A 5-year lease with two 5-year renewal options could be a 5-year or 15-year obligation depending on reasonable certainty analysis. The assessment requires judgment about economic incentives, leasehold improvements, relocation costs, and operational significance of the asset.
How Arvexi handles this
Arvexi extracts extension option details from lease documents and flags them for reasonable certainty assessment. The platform models both scenarios. with and without extension. so your team can evaluate the financial impact before making the judgment call.