In short
The lease term is the noncancelable period of a lease plus periods covered by an option to extend that the lessee is reasonably certain to exercise, an option to terminate it is reasonably certain not to exercise, and any option controlled by the lessor.
Key takeaways
- It drives lease classification and the measurement of the lease liability.
- The lessee reassesses it after a significant event within its control, such as building major improvements.
- Economic incentives, such as below-market renewal rates, point toward reasonable certainty.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?