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Explaining the Lease Term Wizard for GASB, FASB, IFRS and Transition Leases
The Lease Term Wizard is available for every lease entered in the software. The wizard assists the user in defining the lease term according to the guidance of the specified lease standard.
FASB & IFRS
The Lease Term Wizard asks two questions that are identical across FASB and IFRS accounting standards:
1) Are you reasonably certain you will bypass any early termination option(s)?
2) Are you reasonably certain to exercise a renewal option(s)?
Under FASB and IFRS, the distinguishing term for identifying lease term is 'reasonable certainty.' This is used to determine the non-cancellable period of a lease.
If the user choses to not bypass an early termination option and is reasonably certain that the early termination option will be exercised, the software truncates the lease term according to the early termination date. Payments are entered only through this date.
Conversely, if a user is reasonably certain to exercise a renewal option, the software extends the lease term according to the detailed renewal period. For correct measurement and recognition, payments are entered through the renewal period. Under FASB and IFRS, if payments are not known for the renewal period, reasonable estimations are made and revised as confirmed.
To review the authoritative guidance, see the following:
FASB ASU 2018-11, ASC 842-10-30-1 through 842-10-30-4
GASB
The Lease Term Wizard asks two questions specific to the GASB accounting standard:
1) Are the lessee or lessor reasonably certain to bypass any early termination option(s)?
Hint: Answer "Yes" if there is an economic incentive to continue the lease beyond early termination option(s) through to the contractual end date (or longer with a renewal option)
Answer "No" if:
a) lessee or lessor will not continue beyond the termination option
b) a fiscal funding or cancellation clause is reasonably certain to be exercised
c) both lessor and lessee have the right to terminate
2) Are you reasonably certain to exercise a renewal option(s)?
Under GASB guidance, a lease term is the non-cancelable period (including, if applicable, a notice period for cancelable lease) along with:
- Any period that the lessee or lessor has, or both have, the option to extend the lease without requiring the consent of the other party, if it is reasonably certain the option will be exercised
- Any period that either the lessee or lessor has, but both do not have, the option to terminate the lease, if it is reasonably certain the option will not be exercised by that party
If the user choses to not bypass an early termination option and has reasonable certainty that the early termination option will be exercised, the software truncates the lease term according to the early termination date. Payments are entered only through this date.
Conversely, if a user is reasonably certain to exercise a renewal option, the software extends the lease term according to the detailed renewal period. For correct measurement and recognition, payments are entered through the renewal period. Under FASB and IFRS, if payments are not known for the renewal period, reasonable estimations are made and revised as confirmed.
To further review the authoritative guidance, see the following:
GASB Statement no. 87, Paragraphs 12 - 15
Transition Leases
For all standards, use the facts and circumstances that exist as of the date of implementation to answer the Lease Term Wizard for transition leases.