If you have a Break Clause (also called “option to break”) in your contract that you want represented on your Agreement for IFRS 16 Reporting purposes, this article will demonstrate the process.
Entering a Break Clause for IFRS 16 Reporting
When creating your new Agreement:
- On the Events page of the Agreement Wizard, expand the “Initial Term and Renewal” section.
- In the “Initial Term of Agreement” section, use the calendar tool or plus/minus buttons to record the break clause period.
Example: This contract has a break clause/option to break after 1 year from the commencement date. The commencement date is 1 October 2023, so the end date of the “Initial Term of Agreement” has been recorded as 30 September 2024.
- Click “Add Renewal”. Adjust the renewal term so that the “term end date” reflects the date that the initial term of your contract finishes.
Example: The initial term of this contract is 5 years. The option to break is after 1 year. The term will finish 5 years after the commencement date, but the term will be entered as 4 years, because of the option to break after 1 year.
- If your contract includes more than one term, continue to click “Add Renewal” and adjust the term length to reflect these additional renewal terms.
Including your Break Clause in IFRS 16 Reporting
After you've finished onboarding your Agreement, the next step is to record your IFRS 16 assumptions regarding exercising the break clause.
Using the approach above, a break clause is represented on your Agreement as a Renewal event. As such, you'll need to use the Expected Number of Renewals functionality in the Initial 1FRS 16 Questionnaire and Settings Change Questionnaire to make any changes around your expectation of exercising the option to break:
Selecting zero (0) in the Expected Number of Renewals corresponds to an intention to exercise the option to break and exit the contract.
Selecting one (1) in the Expected Number of Renewals corresponds to an intention not to exercise the option to break, instead staying for the full initial term of the Agreement.
Selecting the final option you can see in the Expected Number of Renewals (note: recall that this directly reflects the number of renewal events entered on the Events page) corresponds to an intention to take up all renewals and stay until the final expiry of the Agreement.
Any subsequent Renewals added to your Agreement will correspond to the remaining available options for selection.
Whichever selection you've made at Commencement/Transition, if you've changed your assumption after Commencement/Transition, you can reflect this change by updating the Expected Number of Renewals functionality in the IFRS 16 Settings Change Questionnaire.
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