Extension option
A contractual right giving the lessee the ability to extend the lease term beyond the original expiry date.
Definition
An extension option (also called a renewal option in many lease agreements) gives the lessee the right to extend the lease for one or more additional periods. Under IFRS 16 and amended FRS 102, the lease term used for measurement includes optional extension periods only where the lessee is reasonably certain to exercise the option. Assessment of whether an option is reasonably certain must consider all relevant economic factors and is an area requiring significant management judgement.
Why it matters
The decision to include or exclude extension periods from the lease term can materially affect the lease liability and ROU asset. Including a five-year extension option can significantly increase recognised balances.
In AuditLease
AuditLease stores the extension option details alongside the reasonably certain judgement rationale, so the lease term assumption is fully evidenced and auditable.
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.