This is part of the optional ARO module for EZLease.
If you enter the options on a lease, you can have EZLease test AROs to see if their cost is high enough to impose an economic penalty that compels renewal of the lease for some or all of the options. You may require recognizing options that cover a specific percentage of the useful life of an ARO’s associated asset, or at least the number of months specified (whichever is less). You may also instruct EZLease to skip minimal AROs, having a current payment cost less than the specified amount. If the percentage or months are zero, that test is skipped and only the other test applies.
With this test selected, when you enter an ARO, its useful life is compared to the remaining life of the lease (including currently recognized options). If the minimums specified are not met, and the lease has renewal options that have not been recognized, enough options are recognized to cover the minimum life required. EZLease informs you that options have been recognized to meet the economic penalty test, and also whether some of the useful life remains uncovered.
The economic penalty test applies only to AROs that are attached to actual capital or operating leases. If an ARO is attached to an ARO-only record, the end date of the base record is automatically extended to cover the entire useful life of an attached ARO.
A lease starts 7/1/2012 and runs for 10 years, with 4 5-year renewal options, none of which are deemed reasonably assured of exercise at lease inception. On 11/1/2012, an ARO is recognized on leasehold improvements with a useful life of 25 years. The economic penalty system options state that the penalty calculation should require renewal to cover 75% of the useful life, or at least 180 months, whichever is less. 75% of 25 years is 225 months, so our minimum lease term is 180 months from 11/1/2012, to 10/31/2027. The first lease option covers from 7/1/2022 to 6/30/2027. The second lease option covers from 7/1/2027 to 6/30/2032, which covers the minimum useful life. The first two options are marked as recognized, and the lease is recalculated using the changed end date.