ASC 842: Determining the lease term

We continue the CPEA lease standard implementation series as we focus on the major areas of change as a result of the new lease standard (FASB Accounting Standards Codification (FASB ASC) 842, Leases). In this report, we focus on the definition and determination of the lease term, which is a crucial aspect of the new standard affecting the classification of a lease, the determination of lease payments, the measurement of the lease asset and liability, and whether the lease meets the definition of a short-term lease. We explain each portion of the lease term, starting with the noncancelable period plus all of the following:

• Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option

• Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

• Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor