What Qualifies as a Lease Payment vs a Non-Lease Payment or Variable Lease Payment?

How to define lease payments versus non-lease payments when adding a lease in LeaseCrunch.

Are base rent payments the only thing to consider when adding a lease to LeaseCrunch?  Before creating payment streams in Step 2 of Adding a Lease, consider the following FASB / IFRS Summary Guidance:

Lease Payments

Lease Payments include:

• Fixed payments

• Variable lease payments (see details and examples below) that depend on an index or rate that are measured on the Start Date

• Purchase cost at the End Date of a lease (if reasonably certain to exercise/purchase)

• Termination fees

• Residual value guarantees

• Reimbursement of lessor costs (e.g., real estate taxes in an office lease) as long as they are not variable (e.g., no true up)

• Non-lease component costs like common area maintenance (CAM) if lessee has made a policy election to combine lease and non-lease components.

• Lease incentives paid after the Start Date, which reduce Lease Payments

If you desire to capture payments that do not fit the definition of Lease Payments in the software, those payments can be entered in the Variable Expense and Non-Lease Payments tab.

If you'd like to use a template to calculate lease payments that increment by amount or percentage before inputing into LeaseCrunch, you can download one here: Payment Stream Calculator

Variable Lease Payments

Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that depend on a variable fact or circumstance occurring after the commencement date (Start Date), other than the passage of time. A common example is a rate based on performance metrics.

As summarized in the table below, variable lease payments are either:

1. Lease Payment (entered in the Lease Payments & Classification tab)

2. Variable Lease Expense (entered in the Variable Expense and Non-Lease Payments tab)

Lease Payments

Technical Guidance (FASB: 842-10-30-5/IFRS 16: Paragraph 27): At the commencement date (Start Date), the Lease Payments shall consist of the following payments relating to the use of the underlying asset during the Lease Term:

A. Fixed payments, including in substance fixed payments (i.e., payments that may, in form, contain variability but that, in-substance, are unavoidable-See FASB: 842-10-55-31/IFRS 16: Paragraph B42), less any lease incentives paid or payable to the lessee. The reduction for lease incentives should be only those received after the Start Date. If the incentives are received at or prior to the Start Date, include them in the Incentives Received field in the software.

1. Fixed payments includes activities or costs that are not components of a contract, such as reimbursement of lessor’s costs (e.g., real estate taxes or insurance in an office lease) per FASB 842-10-55-142 through 3.

B. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date (Start Date). Variable lease payments are defined as payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. Variable lease payments not dependent on an index or rate, such as % of sales, are not deemed Lease Payments and should be entered into the "Variable Expenses & Non-Lease Payments" section of the software.

1. Under FASB only, each time there is a change in the variable lease payment resulting from a change in the reference index or rate, record as a period expense, which can be entered in the section titled, "Payment Stream for Variable Expense and Non-Lease Payments." See Examples at FASB: 842-10-55-225 through 231.

2. Under IFRS 16 only, each time there is a change in the payment resulting from a change in the reference index or rate, revise the Lease Payments to include this change (Use Revision tab).

C. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph FASB: 842-10-55-26/IFRS 16: Paragraphs B37-B40).

D. Payments for penalties for terminating the lease if the Lease Term reflects the lessee exercising an option to terminate the lease.

E. Fees paid by the lessee to the owners of a special-purpose entity (SPE) for structuring the transaction.

F. Amounts probable of being owed by the lessee under residual value guarantees (see FASB: 842-10-55-34 through 36/IFRS 16: Appendix A, Page 27).

G. Payments made to return the underlying asset to its original condition (see FASB: 842-10-55-34/IFRS 16: Paragraph 24 for criteria).

H. Payments for non-lease components (e.g., common area maintenance payments in an office lease) only if lessee has elected a policy to combine lease and non-lease components per FASB: 842-10-15-37/IFRS 16: Paragraph 15.

Non-Lease Payments

(FASB: 842-10-30-6): Lease Payments do not include any of the following:

A. Variable Lease Payments not based on an index or a rate. Examples include payments based on a % of sales or based on the number of hours an asset is used. See examples at FASB: 842-10-55-150 through 154 and 842-10-55-232 through 234.

B. Any guarantee by the lessee of the lessor’s debt

C. Amounts allocated to non-lease components in accordance with 842-10-15-33 through 42/IFRS 16: Paragraph 12-16) if lessee does not elect a policy to combine lease and non-lease components per FASB: 842-10-15-37/IFRS 16: Paragraph 15).

D. Payments for activities or costs that are not components of a contract (e.g., taxes or insurance in an office lease) if those amounts are variable per FASB 842-10-55-141 through 142.