FRS 116 Leases – Lease Term
Lease term would probably be one of the most crucial parts business owners, as lessees, would look at in a tenancy agreement. When dealing with accounting transactions about leases, the accountants in an accounting firm in Singapore need to know the lease term as they need to determine when and how they should recognise, measure, present and disclose the related information. Hence, lessees need to have an in-depth understanding of the rules and requirements regarding lease terms that FRS 116 has listed out.
A company should determine the lease term as a period where the lease is non-cancellable. It should also identify the periods that an option of extending the lease cover if the lessee is quite sure that he will implement this option, as well as the periods that an option of terminating the lease cover if the lessee is quite sure that he will not implement this option.
When a company is evaluating whether a lessee is relatively certain to implement an option of extending, or not terminating a lease, it should consider all the related conditions and facts which has created the economic incentive for him to extend or not to terminate the lease.
On the other hand, a lessee should reexamine whether it is sensibly sure to apply the option of extending or not terminating the lease when a significant event has happened or when the condition has changed significantly. The event or the change refers to those that are within the lessee’s control and will influence his level of certainty on implementing an option which the lease term does not include previously, or not implementing an option that the lease term has included already.
If a lease’s non-cancellable period has changed, then the company should revise the lease term. As an instance, there will be a change in the non-cancellable period of a lease if the lessee implements an option that the company’s determination of lease term has not included previously. If he does not choose to apply an option which the company’s determination of lease term has included before that, the non-cancellable period may alter too. In some occasions, there are some events which contractually require the lessee to implement an option which is not covered by the company’s determination of lease term, or those that prohibit the lessee from applying an option that the company’s determination of lease (Also see FRS 116 Leases – Recognising and Measuring Finance Leases) term has covered previously. Both these types of events can cause a change in the non-cancellable period of a specific lease.