6.5 Penalties for Terminating a Lease
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: . . .
d. Payments for penalties for terminating the lease if the lease term (as determined in accordance with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease. . . .
As discussed in Chapter
5, the lease term includes any periods
covered by an option of terminating the lease if
it is reasonably certain that the lessee will
not exercise that option. In a manner
consistent with the determination of the lease
term, the lease payments would not include a
termination penalty if it is reasonably certain
that the lessee will not exercise that termination
option. However, if it is not reasonably certain
that the lessee will not terminate the lease, the
term would not include the
period past the termination date and the lease
payments would include any
related termination penalty.
The same treatment would apply to renewal options. That is, to the extent that a
lessee exercising a renewal option would be
required to pay a renewal fee, the lease payments
would include the renewal fee if it is reasonably
certain that the lessee will exercise the renewal
option. Conversely, the lease payments would not
include the renewal fee if it is not reasonably
certain that the lessee will exercise the renewal
option.
The FASB included Example 26 in ASC 842-10-55-235 through 55-238 to illustrate
the impact of termination penalties on lease payments.
ASC 842-10
30-8 . . . Example 26 (paragraphs 842-10-55-235 through 55-238) for an illustration of the requirements on
termination penalties.
55-235 Example 26 illustrates how a lessee accounts for termination penalties.
Example 26 — Termination Penalties
55-236 Lessee enters into a
10-year lease of an asset, which it can terminate
at the end of each year beginning at the end of
Year 6. Lease payments are $50,000 per year during
the 10-year term, payable at the beginning of each
year. If Lessee terminates the lease at the end of
Year 6, Lessee must pay a penalty to Lessor of
$20,000. The termination penalty decreases by
$5,000 in each successive year.
55-237 At the commencement date, Lessee concludes that it is not reasonably certain it will continue to
use the underlying asset after Year 6, having considered both the significance of the termination penalty (in
absolute terms and in relation to the remaining lease payments after the date the termination option becomes
exercisable) and the other factors in paragraph 842-10-55-26.
55-238 Accordingly, Lessee determines that the lease term is six years. At the commencement date, Lessee
measures the lease liability on the basis of lease payments of $50,000 for 6 years plus the penalty of $20,000
payable at the end of Year 6.