-
ASC 842 & Variable Payments
The ASC 842 lease accounting standard, introduced by the Financial Accounting Standards Board (FASB), has transformed how businesses record their lease agreements on the balance sheet. A significant part of this new standard is how it deals with variable lease payments, which are payments that can change over the duration of a lease. This article breaks down the concept of variable lease payments under ASC 842, offering easy-to-understand examples for each type.
ASC 842 at a Glance
ASC 842 requires companies to show lease assets and liabilities on their balance sheets, giving a clearer picture of a company's financial obligations. This applies to leases longer than 12 months.
What are Variable Lease Payments?
Variable lease payments are not fixed; they can go up or down based on various factors. Let's look at the different types and see examples of each.
Types of Variable Lease Payments and Examples
Indexed or Rate-Based Payments
Definition: Payments adjusted based on a specific index or rate, like interest rates or inflation.
Example: A company leases office space with rent that increases by 2% annually, based on the Consumer Price Index (CPI).
Performance-Based Payments
Definition: Payments that change based on how well the leased asset performs or how much revenue it generates.
Example: A restaurant agrees to pay 5% of its monthly sales from a leased food truck as part of its lease payment.
Usage-Based Payments
Definition: Payments determined by how much the leased asset is used.
Example: A construction company leases a crane and pays based on the number of hours it's used each month.
Real Estate Taxes and Insurance
Definition: Payments that fluctuate with changes in real estate taxes or insurance premiums.
Example: A retailer's lease payment for a store includes a portion that varies each year, depending on the property tax assessed on the building.
Incentive Payments
Definition: Payments that adjust when certain targets or goals are met, potentially leading to reduced lease payments.
Example: A business leasing solar panels may have lease payments decrease if the panels generate more electricity than a set target.
Market Rate Adjustments
Definition: Payments that adjust according to the current market conditions, unrelated to a specific index.
Example: The lease for a boutique shop includes a clause allowing for rent adjustment to the current market rate at the midpoint of the lease term.
-
How ASC 842 Treats Variable Lease Payments
Under ASC 842, the way these variable payments are handled in accounting depends on what causes the payment to change:
Indexed or Rate-Based Payments are initially included in the lease liability and amortization schedule if they impact payments at the start. However, future changes are recorded as they happen and do not alter the amortization schedule.
Performance-Based, Usage-Based, Real Estate Taxes, Insurance, Incentive, and Market Rate Adjustments are not included in the initial lease liability or amortization schedule. These are recorded in the periods they occur, reflecting the company's financial situation accurately without adjusting the original lease amortization plan. -
ASC 842's approach to variable lease payments ensures that companies accurately report their financial obligations, providing clarity to stakeholders. By understanding the different types of variable payments and their accounting treatment, companies can navigate the complexities of ASC 842, ensuring compliance and transparency in financial reporting. This insight into variable lease payments underlines the standard's commitment to a clearer, more accurate depiction of a company's leasing activities.
Use iLeasePro for your Lease Variable Payment Accounting
Use our expertise to help you, you can call iLeasePro at 888-351-4605, or you can go to iLeasePro.com and access our excellent information about our software products and our process to find out how it all works.
Try it today and see for yourself how easy it is to use! View our pricing and Schedule A Demo Now to learn more and see how iLeasePro can work for you.
Let iLeasePro Simplify Your Lease Accounting
Schedule a DemoRelated: iLeasePro Free Trial, iLeaseXpress, iLeaseXpress Unlimited, ASC 842 Financial Reporting, ASC 842 Balance Sheet Reporting, ASC 842 Income Statement Reporting, ASC 842 Cash Flow Reporting, ASC 842 Statement of Shareholder Equity, ASC 842 Disclosure Notes, ASC 842 Management Discussion, ASC 842 Comprehensive Income, ASC 842 Glossary of Terms, ASC 842 Journal Entries, ASC 842 Software, When Is the ASC 842 Compliance Date, FASB Lease Accounting Software, Understanding the New FASB ASC 842 Lease Accounting Standard, How Does a Lease Balance Sheet Change After the New Standard?, Tracking Lease Details After ASC 842, Deferred Rent Explained Under the ASC 842, Guide to Lease Classification, Overview of Relevant Borrowing Rate, ASC 842 Footnote Disclosure, Lease Accounting, What Does Lease Accounting Software Do?, Key Features of A Lease Accounting Software, How to Never Miss Important Lease Dates, Scaling Your Lease Accounting Software to Your Business Needs, How to Select the Right Lease Solution, How to Set Up Lease Accounting Software, What is the Best Lease Accounting Software?, Overview of the Types of Leases, Equipment Lease Software, How the Right Lease Management Software Makes Equipment Leases Easier, Lease Tracking Software, How The Right Software Can Help You Manage Lease Data, Five Benefits of a SaaS Lease Management Solution, A Centralized Lease Portfolio Making Asset Management Easier, Lease Analysis 101, Lease Analysis: The Financial Metrics, Lease Abstraction, The Importance of Lease Abstraction for Lessees, The Lease Data an Abstract Should Include, What Software Do I Need for Lease Abstracting?, Navigating The ASC 842 Accounting Audit, Ultimate Lease Accounting Audit Checklist, Essential Guide To Engaging Auditors, Leveraging AI for Enhanced Year-End Audits Transitioning to the ASC 842 Standard Lease Document Management ASC 842 Short-Term Leases Practical Expedients Lease Modifications & Remeasurements Embedded Leases Monitoring Critical Lease Dates Transportation - Navigate the ASC 842