Break clause
A contractual provision allowing either party to terminate the lease at a specified date or after giving notice.
Definition
A break clause is a practical form of termination option. For accounting purposes, the lessee must assess whether it is reasonably certain NOT to exercise the break. If it is, the lease term continues past the break date and the lease liability reflects the longer term. If it cannot say that, the term ends at the break date.
Why it matters
Break clauses are common in UK commercial leases. The judgement about whether a break will be exercised is reassessed only on a significant event or significant change in circumstances within the control of the lessee, and auditors look closely at how it was reached. Unexpectedly keeping a lease past a break date triggers a remeasurement.
In AuditLease
AuditLease flags leases with approaching break clause dates in the upcoming events report. Break clause judgements are stored and included in audit evidence.
Related terms
Put this into practice with AuditLease
AuditLease handles IFRS 16 and FRS 102 lease calculations, statutory note generation, journal entries, and audit evidence, so your team spends less time on spreadsheets and more time on judgements.
This definition is for general information only and is not accounting or legal advice. Definitions are based on IFRS 16, FRS 102, and associated guidance published by the IFRS Foundation and the Financial Reporting Council. Users should refer to the applicable accounting standards and their professional advisers for judgement-specific matters.