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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Dunmore plc, a lessee, leases a building for 10 years with an option to extend for 5 years. At commencement it was not reasonably certain that the option would be exercised. In year 4, Dunmore builds significant specialised leasehold improvements that give it an economic incentive to extend. The original discount rate was 6% and the rate implicit in the lease is not readily determinable. Which treatment is correct?

Dunmore must reassess the lease term because of a significant event within its control, remeasure the lease liability using a revised discount rate for the remaining term, and adjust the right-of-use asset by the same amount.

  1. ANo reassessment is made until the option is actually exercised
  2. BReassess the lease term, remeasure the liability using a revised discount rate, and adjust the right-of-use assetCorrect
  3. CReassess the lease term and remeasure the liability using the original 6% rate, recognising the difference in profit or loss
  4. DTreat the extension as a separate lease

Explanation

Significant leasehold improvements within the lessee's control that affect whether an option is reasonably certain trigger reassessment of the lease term. The liability is remeasured using a revised discount rate for the remaining term, with the adjustment made to the right-of-use asset. Waiting until exercise or using the original rate is incorrect. It is not a modification, so no separate lease arises.

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