Lease Term
Related terms
Category
General Concepts
The lease term is the non-cancellable period of a lease plus any periods covered by renewal or termination options that the lessee is reasonably certain to exercise. Determining the lease term requires judgment about option exercise and affects both classification and measurement.
Why it matters
The lease term directly determines the magnitude of the lease liability and ROU asset. A 5-year lease term produces a fundamentally different balance sheet impact than a 10-year term with renewal options. Judgment about whether renewal options are "reasonably certain" to be exercised is one of the most significant estimates in lease accounting.
Factors that indicate reasonable certainty include significant leasehold improvements, the importance of the underlying asset to operations, costs associated with not renewing, and historical practice of exercising similar options.
How Arvexi handles this
Arvexi extracts lease term information from documents, including base term, renewal options, and termination rights. The platform flags options that require judgment about reasonable certainty and allows your team to document their conclusions. When options are subsequently exercised or allowed to lapse, Arvexi triggers the appropriate remeasurement.