CERTYNEX IFRS ACADEMY

Lumbres leases a shop for a non-cancellable period of 3 years, with an option to extend for 5 years. At the commencement date, it makes significant leasehold improvements with a useful life of 8 years that cannot be moved elsewhere. The accountant uses a lease term of 3 years on the grounds that the option has not yet been exercised, with no further analysis. What is the error?

8 years should have been used automatically, since every extension option enters the lease term.

The economic incentive created by the significant leasehold improvements was not assessed to judge whether the extension is reasonably certain.

The lease term must match the useful life of the improvements, whatever the options.

No error: an option not yet exercised can never enter the lease term.