What is a Lease term?

The Lease Term is the non-cancellable period during which a lessee has the rights to use a leased asset.

The Lease Term also includes periods covered by option clauses found within the lease itself that are "reasonably certain" to be exercised. These options and how to calculate the Lease Term will be outlined further below.

Why is it Important?

The Lease Term is important as it is considered a key input in deriving the values of both the lease liability and the ROU asset. In short, the longer the Lease Term the larger your lease liability and ROU asset will be.

Given that the determination of the Lease Term directly impacts the values of the lease liability and ROU asset and can often involve judgment by management it is often an area of focus for auditors and therefore should be given sufficient attention

The length of the Lease Term also determines which policy elections are available to you. Under the new guidelines, entities have the option to elect to not apply the new reporting requirements for leases under one-year in length. This is commonly referred to as the "Short-term Lease Exemption."