IBERSOL | Annual Report 2021

ANNUAL REPORT 2021 comprising the non-cancellable period during which the lessee has the right to use an underlying asset and (i) the periods covered by an option to extend the lease, if the lessee has a reasonable certainty of exercising this option; (ii) the periods cov- ered by a lease termination option, if the lessee is reasonably certain that it will not exercise that option. Alternatively, in cases where the Group intends to exercise any existing call options for the underlying asset, the right to use is depreciated over the estimated useful life of the asset. Leasing liabilities Lease liabilities are initially measured based on the present value of the lease liabili- ties at the date. Subsequently, the lease liability is adjusted for the effect of interest and lease payments, as well as for possible changes to lease agreements. Lease pay- ments include payments made to a lessor for the right to use an underlying asset during the term lease terms (excluding variable lease payments) and also include the exercise price of a call option, if there is a reasonable expectation that the Group will exercise it, and the amount of penalties for termination of contracts, if it is reason- ably certain that the Group triggers the possibility of termination. To determine the present value of lease payments, in cases where it is not possible to obtain the implicit interest rate, the Group uses the incremental financing rate, which represents the interest rate that the Group would have to pay to borrow for a similar term, and with a similar guarantee, the funds necessary to obtain an asset of an equivalent value to the asset under right of use in a similar economic context. The Group determines the lease term as the non-cancellable period of the lease, taking into account the periods covered by an option to extend the contract if it is reasonable for the Group to exercise it, or any periods covered by an option to terminate the contract, if it is reasonably certain that the Group will not exercise it. The lease term is thus comprised between the minimum corresponding to the non- cancellable period of the contracts and the maximum corresponding to the period during which the contract is enforceable (period after which lessor and lessee are entitled to terminate the lease with no more than a negligible penalty, considering the broader economic circumstances). In determining the lease term, the Group therefore makes a judgment about the relevant factors that create an economic incentive to exercise the renewal or termi- nation (in cases where such options belong to the lessee and the lessor, the Group exercises judgment about the economic incentives for lessor and lessee). Among other aspects, the Group takes into account: - the value of the non-transferable investments made in each commercial space and the estimate of the recovery period and use of such investments; - if the renewal / termination option takes place in a shorter or more distant time horizon (the shorter the non-cancellable period of the contract, the greater the probability that the Group will exercise the renewal option, the opposite being true in the case of contracts with long non-cancellable periods); 355