Early termination is an example of optionality. Callable bonds and demand deposits also contain optionality. That doesn’t make them options.
Yes, I know. I was using <quote>"call option"<unquote> as analogy and not a strict legal financial instrument. Sort of like the "Greenspan Put" isn't really a "put option". Or how some might saying investing in Uber is a sort of like a <quote>"call option"<unquote> on future taxi & employee regulations favoring companies like Uber.
A lease is really closer to a set of futures contracts than a call option. You can't just walk away from a lease if you don't want it anymore.
Correct, and that's why I specifically wrote "often negotiated" and not "always included". I wasn't writing in absolutes.
>The early termination fee there is simply "the remaining rent", which is what is reflected _here_.
(Not sure what previous comment the "here" in "reflected here" is referring to.)
I was talking about leases where the negotiated termination fee is much less than the remaining rent. It depends on market forces. (If the office landlord has lots of vacancies and is desperate for tenants, favorable termination fees will be more common.)
If not putting leases on balance sheets understates actual liabilities, then likewise, adding entire lease terms with optionality overstates it.
That's not my intention. I'm staying within the bounds of plain accounting for the concept of "debt liability".
If a company has a 5 year lease of $1000/month rent, I think the new accounting rules says it's a 60x$1000=$60000 "debt".
But in my mind, the company really isn't on the hook for all $60k. If the company has an "early termination" or "lease buyout" clause that they can exercise at year 2 with a 6-month notice to the landlord, they are really only in "debt" for 30 months (24+6), not 60. The rest of the 30 months act more like a "call option" than a debt instrument because the company really doesn't have to pay it. I'm not an accountant and just thinking out loud. And to reiterate, this "optionality" math applies more to office space leases than equipment leases like airplanes.
But I don't think the goal of accounting is to expose all of those contract terms to casual investors.
It seems like another valid way to look at the lease (for renting space) is to consider it a "call option" on a agreed upon price with an expiration date. Therefore, you don't count the whole lease as a bank-like debt but instead, count the "lease termination" fee.
(Or maybe I'm taking the examples discussed in HN too literally and the actual IFRS text already covers both situations and the company can choose to record "remaining term" or "termination fee" -- whichever is the lower amount. The termination fees for equipment like airplanes and tractors is higher percentage (must pay remaining residual value) than office space which makes it behave more like a "loan".)