How to Calculate Lease Consideration

At the lease commencement date, the lease payments shall consist of the following payments relating to the use of the underlying asset during the lease term:

1. Fixed Payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee 

• In Substance Fixed Payments 
  • • Payments that may, in form, appear to contain variability but are, in effect, unavoidable. In substance fixed payments for a lessee or a lessor may include, for example, any of the following:
      • Payments that do not create genuine variability, such as those that result from clauses that do not have economic substance. 
      • The lower of the payments to be made when a lessee has a choice about which set of payments it makes, although it must make at least one set of payments.

• Lease Incentives Paid or Payable 
  • • Lease incentives include both of the following : 
      • Payments made to or on behalf of the lessee
      • Losses incurred by the lessor as a result of assuming a lessee’s pre existing lease with a third party

2. 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. 

3. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option.

4. Payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.

5. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. 

6. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees. 

Only payments allocated to the lease should be considered for purposes of classifying the lease.

Examples of Lease Consideration: 

• Fixed Payments:
  • Non-refundable lease payments 
  • Monthly fixed lease payments 
• Incentives:
  • Lessor reimbursement of moving costs 
  • Tennant improvement allowance 

Examples of Non-Lease Consideration:

• Refundable lease payments
• Payments based on a change in an index or a rate 
• Real estate taxes as they do not provide a separate good or service 
• Leasehold improvements paid for by the lessee and not specifically required in the lease contract 
• Lease payments tied to sales amounts, regardless of historical and projected performance even if performance seems guaranteed 

Accounting Guidance Referenced:

• ASC 842-10-30-5
• ASC 842-10-55-31 
• ASC 842-10-55-30