Reasonable certainty

Have you ever wondered what is the definition of reasonable certainty under IFRS 16. An entity shall determine the lease term as the non-cancellable period of a lease, together with both:-

a. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that options; and

b. periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

Now, the issue is IFRS 16 does not define what is reasonably certain. However, if we refer to US GAAP that does.. Wow.. Now what does US GAAP says:

FASB has determined that “reasonably certain,” is a high threshold, such as a probability exceeding 75-80 percent. This is again a bit dicey as to how should an entity determine the probability of an event happening or not. If we deep dive there is a difference between what is reasonably certain and reasonably assured. This is what FASB has to say.

Under IAS 17, an entity used a reasonably certain threshold to evaluate the lease term; this threshold is generally interpreted as high. When developing ASC 842 ( similar to IFRS 16 but with some differences), the Board decided to use the term “reasonably certain” to be consistent with IFRS 16 (which supersedes IAS 17). However, ASU 2016-02 indicates that the “reasonably certain” threshold is substantially the same as the “reasonably assured” threshold under ASC 840. Therefore, we can state “reasonably certain” will also be considered a high probability.

Finally, this is for you all to think, what if the entity has a policy where only upon happening of an event they would be reasonably sure or not sure. What should be the accounting treatment in this scenario?

Give your comments to what do you think and discuss this in our wider forum section! For the expert answer refer to our Expert Q&A’s section as well. !

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