What is a Bargain Renewal Option?

• A. A provision to terminate the lease early.
• B. A provision allowing lessee to renew the lease for a rental sufficiently lower than the expected fair value and reasonably assured to exercise.
• C. A provision to renew at market rate.
• D. A purchase option.

Answer: (B)

A bargain renewal option is a renewal provision where the renewal rent is significantly below the expected fair value and the lessee is reasonably assured to exercise it. Because the renewal is so favorable and highly likely, it effectively becomes part of the lease term under accounting rules. Including this renewal period in the term increases the lease liability and the right‑of‑use asset, since payments during that extended term are expected to occur. This is what makes it the best choice: it describes a renewal option that is both below-market and reasonably certain to be exercised, which is exactly how the term should be measured for lessee accounting. The other options describe different features—terminating early, renewing at market rate, or a purchase option—that do not fit the definition of a bargain renewal option.