Lease Term
The lease term is the noncancellable period for which a lessee has the right to use an underlying asset, adjusted for options to extend or terminate the lease where their exercise, or non-exercise, is reasonably certain.
Leasing
Explanation
Under ASC 842 and IFRS 16, the lease term includes:
• the noncancellable period of the lease,
• periods covered by an option to extend if the lessee is reasonably certain to exercise it,
• periods covered by an option to terminate if the lessee is reasonably certain not to exercise it, and
• under ASC 842, periods covered by an extension or termination option controlled by the lessor (under IFRS 16, a termination right held only by the lessor also falls within the noncancellable period).
The assessment considers contract-, asset-, entity-, and market-based factors, such as below-market renewal rates, significant leasehold improvements, or termination penalties. A purchase option the lessee is reasonably certain to exercise is assessed alongside the lease term and affects lease payments and classification. Lessees reassess the lease term upon significant events within their control. Lessors generally do not reassess unless the lease is modified.
Why It Matters
The lease term drives nearly every number: lease payments, discounting, classification, the right-of-use asset, and the lessor's net investment or straight-line income. Getting it wrong means remeasurement later. In SAP, lessee accounting runs in SAP CLM, while lessor accounting, including lease term-dependent classification and schedules, runs in SAP RAR.
Related Terms
ASC 842 · Lease Liability · Right-of-Use Asset · Lease Modification · Sales-Type Lease
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