Our client signed a 7-year warehouse lease with a 2-year renewal option and a CPI-linked rent escalation. There's also a purchase option at year 5. How should we assess the lease term and measure the right-of-use asset under IFRS 16? Reference our internal technical position.
Lease term. Start with the 7-year non-cancellable period. Include the 2-year renewal only if the client is reasonably certain to exercise it — weigh the CPI-linked economics, leasehold improvements and relocation cost. Because a purchase option exists at year 5, if exercise is reasonably certain the lease term effectively caps at year 5 and you’d depreciate over the asset’s useful life rather than the lease term.
Right-of-use asset. Measure at the initial lease liability plus:
- Initial direct costs and any prepayments
- Estimated restoration / dismantling obligations
- Less any lease incentives received
CPI escalations enter the liability at the current index at commencement; future CPI movements are remeasured only when cash flows change.
Tribeca technical position. Per the internal manual, document the reasonably-certain judgement contemporaneously and reassess on any significant event. I’ve flagged the purchase-option interaction as the highest-risk judgement for partner review.