BLM11015 - Lease accounting: lease classification: the term of a lease

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

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 (pre 2024 amendments) and FRS 105 

FRS102 (pre 2024 amendments) and FRS 105 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.” 

FRS 102 (2024 amendments) and IFRS 16 

FRS 102 (2024 amendments) glossary defines ‘lease term’ as: 

The aggregate of:

(a) the non-cancellable period of a lease;

(b) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and

(c) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. 

This is very similar to the IFRS 16 definition: “the non-cancellable period for which a lessee has the right to use an underlying asset, together with both: 

  1. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and 

  2. periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option”. 

Under all frameworks, the definitions ensure 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, where it is reasonable to expect them to exercise that right at the start of the lease.