BLM11015 - Lease accounting: lease classification: the term of a lease
The term of the lease can be very important for tax purposes. For example, it determines the period over which a finance lessee should depreciate the leased asset (unless the expected useful life is less), and so the period over which a lessee may obtain a deduction for the capital element of the lease rentals.
FRS 102
FRS102 glossary defines ‘lease term’ as:
“The non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.”
The definition ensures that the lease term includes both the primary period and any secondary period during which the lessee has the contractual right to continue to use the asset and which right, at the start of the lease, it is reasonable to expect them to exercise.
IFRS 16
IFRS 16 defines the lease term as:
“the non-cancellable period for which a lessee has the right to use an underlying asset, together with both:
- periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
- periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option”.