Reasonably certain
The threshold used to assess whether an option will be exercised, a higher hurdle than "more likely than not".
Definition
"Reasonably certain" is the threshold used under IFRS 16 and amended FRS 102 to assess whether a lessee will exercise a renewal or purchase option, or will not exercise a termination (break) option. It is higher than "more likely than not" and is judged on all the relevant economic factors, such as the contract terms, the cost of leaving and how important the asset is to the business. The assessment is made at commencement and reassessed only on a significant event or a significant change in circumstances within the control of the lessee. The judgement must be documented.
Why it matters
"Reasonably certain" is one of the most important judgements in lease accounting. Getting it wrong can change the lease term or the payments included in measurement, and so the resulting lease liability, and a later reassessment can change the discount rate applied. Auditors pay close attention to how this threshold is applied.
In AuditLease
AuditLease lets you record a supporting rationale for each option judgement on the lease. For each judgement type, the key judgements section of the statutory accounts note counts the leases with a recorded rationale and shows one representative rationale; each lease keeps its own.
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.