What factors determine if a lease includes extension options in the lease term?

The determination of whether a lease includes extension options in the lease term primarily hinges on the lessee's intentions and expectations regarding the exercise of those options. If the lessee is reasonably certain to exercise the extension option, this influences the lease classification and accounting treatment significantly.

This assessment is rooted in the guidance provided by accounting standards, which emphasize the importance of the lessee's expectations when defining the lease term. Factors to consider include the lessee's past practices, the economic incentives to extend the lease, and any relevant market conditions. If these elements suggest a strong likelihood that the lessee will continue using the asset beyond the initial lease term, then the extension should be included in the lease term for accounting purposes.

The other choices do not align with the criteria established for assessing lease terms. Absolute requirements from the lessor do not necessarily reflect the lessee's intentions. Prohibitions against termination do not equate to certainty of extension. Lastly, mutual agreement prior to the lease commencement is not a factor in determining lease extension options; rather, it is the lessee's future actions and intentions that matter most in this context.