A cancellable lease is generally an operating lease (rental) that may be terminated by either the lessee or the lessor without penalty. A finance lease is a noncancellable lease in that the lease cannot be cancelled by the lessee or the lessor before its scheduled termination as long as both parties fully comply with the lease contractual terms and conditions. If a finance lease is terminated early, the lessee is held liable for the outstanding lease payments plus the leased asset’s residual value. In some jurisdictions, finance leases must provide the lessee the right of cancellation for a certain period.
Operating Lease = Cancellable Lease
Finance Lease = Noncancellable Lease
The noncancellable lease term where a renewal option is found in a finance lease arrangement is the basic lease term during which the lessor expects to recover the asset cost and its financing cost and to earn a profit on its invested funds. The subsequent time period by which a lease may be extended after the primary lease period is the renewal lease term, during which a nominal rental is paid and the lease is normally cancellable without penalty.
| Lease with Renewal Option |
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