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What is lease term?

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The date when a lease agreement closes or the parties commit to the principal provisions of the lease, whichever is earlier, is lease inception.  This is when the lessor and the lessee recognize the transaction as either a finance or operating lease and the fair value of the lease is established.

The fixed noncancellable period of a finance lease for which the lessee has contracted to lease the asset is the lease term, including any periods for which lease renewal is reasonably certain at lease inception.  The period of an operating lease for which the lessee has contracted to lease the asset is the rental period, it generally being cancellable.

Frequency Distribution by Lease Term (Months)
Term 0 to 11 12 to 23 24 to 35 36 to 47 48 to 59 60 to 71 over 71
Percent of Total 5.28% 14.47% 18.23% 51.96% 6.13% 3.49% 0.44%
Based on 40,721 equipment leases of European financial institutions from 1997 to 2001.
Source: Schmit, Mathias

The term of a finance lease usually corresponds to the estimated economic life of the leased asset and is determined principally by the asset’s anticipated period of use and the lessee’s intention to match the revenue it generates with lease payments.  A leased asset estimated economic life generally depends on the type of asset leased and local accounting and tax conventions.

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