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

Lease payments in lease accounting include fixed payments, certain variable payments measured at lease commencement, purchase options, termination fees, residual value guarantees, reimbursed lessor costs (if fixed), and lease incentives, while variable lease payments dependent on factors after the start date may be classified differently under FASB and IFRS and non-lease payments or variable expenses not meeting lease payment criteria should be recorded separately in the software.

How to Define Lease Payments Versus Non-Lease Payments When Adding a Lease

Are base rent payments the only thing to consider when adding a lease to Crunchafi Lease Accounting software? Before creating payment streams in Step 2 of Add 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.

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.

Variable lease payments are either:

  1. 1.Lease Payment (entered in the Lease Payments & Classification tab)
  2. 2.Variable Lease Expense (entered in the Variable Expense and Non-Lease Payments tab)
  • Payments dependent on an index or a rate initially measured at the Start Date are Lease Payments.
  • Payments dependent on an index or a rate that change after the Start Date are Lease Payments under IFRS and Variable Lease Expense under FASB.
  • Payments that vary because of changes in circumstances, not related to an index or rate (e.g., % of sales), are Variable Lease Expense.

Important Note:

  • Lease Payments entered in Step 2 of Add Lease contribute to the calculation of the Liability and ROU Asset that post to the balance sheet.
  • Variable Lease Payments entered in Step 4 of Add Lease do not contribute to the Liability and ROU Asset calculation.

Additional Technical Guidance / Lease Payments and Non-lease Payments

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), 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. 1.Fixed payments include 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).

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 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. 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."
  2. 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.

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.

G. Payments made to return the underlying asset to its original condition.

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.

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.

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

C. Amounts allocated to non-lease components if lessee does not elect a policy to combine lease and non-lease components.

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.