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.
UK GAAP
SSAP 21 defines the term of a lease as:
“the period for which the lessee has
contracted to lease the asset and any further terms for which the
lessee has the option to continue to lease the asset, with or
without further payment, which option it is reasonably certain at
the inception of the lease that the lessee will
exercise.”
The Guidance Notes express this as:
“The lease term is the primary period of the lease
(i.e., the non-cancellable part) together with any secondary
periods 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 him to exercise.”
IFRS
IAS 17 defines the term of a lease in very similar terms 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.”
It also provides that:
“a non-cancellable lease is a lease that
is cancellable only:
