Your lease does not clearly disclose whether a purchase option exists. Under ASC 842 and IFRS 16 accounting standards, a purchase option that is 'reasonably certain' to be exercised must be included in the lease liability calculation — a disclosure gap that can materially misstate your company's balance sheet.
By Angel Campa, Founder · Updated March 2026
Flagged when the purchase option status is not identified in the lease document.
For companies subject to ASC 842 (US GAAP) or IFRS 16, an undisclosed purchase option creates audit risk. If a purchase option exists and is later determined to be reasonably certain of exercise, the right-of-use asset and lease liability must be recalculated to include the option price in the remaining lease payments. This can increase reported lease liabilities by the full option price — potentially millions of dollars — requiring restatement of prior period financials. External auditors increasingly flag purchase option disclosures as a high-risk area in lease accounting.
Ensure the lease explicitly states whether a purchase option exists. If it does, document the option price, exercise conditions, notice requirements, and expiration date. For ASC 842 compliance, your accounting team should assess whether the option is reasonably certain of exercise at each reporting date and adjust the right-of-use asset and lease liability accordingly. If no purchase option exists, consider adding a lease provision explicitly stating this to prevent ambiguity during future audits.
Under ASC 842, 'reasonably certain' is a high threshold — roughly equivalent to 'probable' under the old lease accounting standard. A purchase option is reasonably certain of exercise when the economic incentive to exercise is significant. Factors include: the option price compared to fair market value, the significance of leasehold improvements, the importance of the location to business operations, and costs of relocation.
When a purchase option is reasonably certain of exercise, the option exercise price is added to the total lease payments used to calculate the right-of-use asset and lease liability at commencement. If the option assessment changes during the lease term (from not reasonably certain to reasonably certain, or vice versa), the lease liability and right-of-use asset must be remeasured. This can create significant balance sheet volatility.
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