6.4 Exercise Price of a Purchase Option Reasonably Certain to Be Exercised
ASC 842-10
30-5 At the commencement date, the lease payments shall consist of the following payments relating to the
use of the underlying asset during the lease term: . . .
c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to
exercise that option (assessed considering the factors in paragraph 842-10-55-26). . . .
When calculating the lease payments, the lessee and the lessor should consider
whether the lessee has the option of purchasing the leased asset and, if so, the likelihood
that the lessee will exercise the purchase option. (See Section 5.3 for a discussion of the effect of this
assessment on the lease term.) If it is reasonably certain that the lessee will exercise its
option of purchasing the leased asset, the lease payments should include the exercise price
of the purchase option. This assessment is consistent with the evaluation of the lease
classification criterion in ASC 842-10-25-2(b)10 and is based on the economic factors in ASC 842-10-55-26 for determining whether a
lessee is reasonably certain to exercise an option. Such factors include:
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Contract-based factors (e.g., the terms and conditions of a purchase option in the contract).
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Asset-based factors (e.g., impact of significant leasehold improvements).
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Market-based factors (e.g., costs associated with exercising the purchase option versus separately buying a similar asset or entering into a new lease for a similar asset).
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Entity-based factors (e.g., the lessee’s intent and past experience with exercising purchase options).
A lessee should remeasure its lease payments when there is a change in the
assessment of whether the lessee is reasonably certain to exercise its purchase option in
accordance with ASC 842-10-35-1. However, the lessor would not remeasure its lease payments
in such circumstances. See Section
6.10 for more information about the requirements for lessees and lessors to
remeasure lease payments. The example below illustrates the effect of purchase options on
lease payments.
Example 6-13
Company S (lessee) enters into an arrangement to lease a building for 10 years
in exchange for fixed annual payments of $100,000. At the end of the 10-year
lease term, S has the option of purchasing the building for $326,000.
Case A — Company S Is Reasonably Certain to Exercise Its
Purchase Option
On the basis of the factors outlined in ASC 842-10-55-26, S has concluded that it is reasonably certain to exercise its purchase option. Therefore, the lease payments are equal to $1,326,000 ($100,000 per year multiplied by 10 years plus the $326,000 purchase price of the building).
Case B — Company S Is Not Reasonably Certain to Exercise
Its Purchase Option
If S determines that it is not reasonably certain to exercise its purchase option, it would not include the $326,000 purchase price in its lease payments. Rather, the lease payments would only consist of $1,000,000 ($100,000 per year multiplied by 10 years).
Footnotes
10
ASC 842-10-25-2(b) requires that a lease be classified as a finance
lease (lessee) or sales-type lease (lessor) if the lease grants the lessee an option of
purchasing the underlying asset and it is reasonably certain that the lessee will
exercise that option.