Lessees exercise purchase options
Lease agreements may include several different options for the lessee, including the option to extend, terminate, or purchase the leased asset. Lessees benefit from purchase options since they give lessees the ability to make the income they can use towards purchasing leased assets at a time when they cannot afford to buy them. Additionally, the ability to not exercise the option facilitates business decisions that keep pace with the lessee’s evolving needs.
To exercise a purchase option, the lessee usually must do so at the end of the lease term, although some agreements allow the lessee to purchase before the end of the lease term.In some cases, the lessee may have the right to purchase the leased asset at a bargain price.
Example:
Let’s say your municipality leased a fleet of vehicles for a term of 24 months. During those two years, it will be required to make its agreed-upon monthly payments. And if it cancels its lease before the end of the two years, it will owe the lessor a penalty. But the lease agreement also includes a purchase option. In other words, at the end of the two years, the lessor will give the city the option of buying the cars. The terms of the purchase are usually outlined ahead of time in the lease agreement.
A purchase option isn’t just important when it comes to what happens after the lease term ends. It could also affect the initial measurement of the lease liability.
The lease liability includes any fixed or variable payments required under the lease. However, it also includes any options reasonably certain of being exercised. For example, if the lease includes a purchase option and it's reasonably certain the lessee will exercise that option, it must be included in the initial measurement of the lease liability.
What’s important here?
A purchase option may be written in a lease and allows the lessee to purchase the associated underlying asset. If a party is reasonably certain to exercise a purchase option, this amount is included in the initial measurement of the lease liability or lease receivable.
