Lease Terms Explained

Updated on 24 Apr 2023
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Use Case: This is a table with all lease terms and their explanation/definition.

Lease Terminology	Explanation
Calculated Lease Classification	US GAAP leases should be listed as financing if any of the following criteria are met: a. Transfer of ownership b. Option to purchase reasonably certain to exercise c. Lease term = major part of remaining economic life d. Present value of lease payments + residual value guarantee >/= all of the asset fair value e. Underlying asset is specialized with no alternative use See section 842-10-55-157 of ASC 842 Note that this can be updated on the lease if there is a strong reason for a change in classification.
Commencement Date	Enter the first day of the period of lease commencement. IFRS 16 p.A743 The date on which a lessor makes an underlying asset available for use by a lessee. http://eifrs.ifrs.org/eifrs/bnstandards/en/IFRS16.pdf US GAAP 842-10-20 The date on which a lessor makes an underlying asset available for use by a lessee. See paragraphs 842-10-55-19 through 55-21 for implementation guidance on the commencement date. https://asc.fasb.org/glossarysection&trid=77888259
Fair Value of the Underlying Asset	Enter the fair value of the underlying asset.
Guaranteed Residual Value NOT Reflected	Enter the residual value guaranteed by the lessee NOT reflected in lease payments.
Impractical to Determine Fair Value?	Is it practical for the lessee to determine the fair value of the underlying asset?
Incremental Borrowing Rate %	Input the rate to apply to lease schedule. Note that this rate is applied monthly on a simple basis (Rate/12). IFRS 16 p.743 The rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. US GAAP 842-10-20 Rate Implicit in the Lease. The rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor. However, if the rate determined in accordance with the preceding sentence is less than zero, a rate implicit in the lease of zero shall be used.
Initial Direct Costs	Values input here increase the initial balance of the ROU asset with the offset to the ROU Clearing account. IFRS 16 p.A743 Incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease. IFRS 16 ¶24 The cost of the right-of-use asset shall comprise: (c) any initial direct costs incurred by the lessee; and http://eifrs.ifrs.org/eifrs/bnstandards/en/IFRS16.pdf US GAAP 842-20-30-5 At the commencement date, the cost of the right-of-use asset shall consist of all of the following: c. Any initial direct costs incurred by the lessee (as described in paragraphs 842-10-30-9 through 30-10). https://asc.fasb.org/section&trid=77888285
Lease Payments	All lease payments should be updated on the Payments tab below. DEFINITION: Payments made by a lessee relating to the right to use an asset during the lease term, comprising: a. fixed payments, less any lease incentives; b. variable lease payments that depend on an index or a rate; c. the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and d. payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease. IFRS 16 p.A744 & US GAAP 842-10-30-5
Lease Classification	Input the classification for this lease. ALL IFRS leases should be listed as Financing. US GAAP leases should be listed as financing if any of the following criteria are met: a. Transfer of ownership b. Option to purchase reasonably certain to exercise c. Lease term = major part of remaining economic life d. Present value of lease payments + residual value guarantee >/= all of the asset fair value e. Underlying asset is specialized with no alternative use See section 842-10-55-157 of ASC 842
Lease Incentives	Values input here reduce the initial balance of the ROU asset with the offset to the ROU Clearing account. IFRS 16 p.A743 Payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee. IFRS 16 ¶24 The cost of the right-of-use asset shall comprise: (b) any lease payments made at or before the commencement date, less any lease incentives received; http://eifrs.ifrs.org/eifrs/bnstandards/en/IFRS16.pdf US GAAP 842-20-30-5 At the commencement date, the cost of the right-of-use asset shall consist of all of the following: b. Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received https://asc.fasb.org/section&trid=77888285
Lease Term	Input the expected term of the lease in # of whole months, inclusive of options reasonably certain to be executed. IFRS 16 p.A744 ...non-cancellable period for which a lessee has the right to use an underlying asset, together with both: a. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and b. periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. US GAAP 842-10-30-1 ...the noncancellable period of the lease, together with all of the following: (a) Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option (b) Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option (c) Periods covered by an option to extend or not terminate the lease in which exercise is controlled by the lessor
Major Part of Remaining Economic Life?	Is the lease term a major part of the remaining economic life of the underlying asset?
Notes	Input any relevant notes related to the lease.
Percentage of Remaining Economic Life	The calculated lease term as a percentage of remaining economic life of the underlying asset.
Prepaid Lease Payment	842 Transition: Debit balance = Enter positive value in this field Credit Balance = Enter negative value in this field Values input here increase the initial balance of the ROU asset with the offset to the ROU Clearing account. IFRS 16 ¶24 The cost of the right-of-use asset shall comprise: (b) any lease payments made at or before the commencement date, less any lease incentives received; http://eifrs.ifrs.org/eifrs/bnstandards/en/IFRS16.pdf US GAAP 842-20-30-5 At the commencement date, the cost of the right-of-use asset shall consist of all of the following: b. Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received https://asc.fasb.org/section&trid=77888285
PV % of Payments & Guaranteed Residual	The present value of the lease payments & guaranteed residual value.
PV Equals or Exceeds Fair Value	Does the present value of the lease payments and residual value guaranteed by the lessee not included in the lease payments equal or exceed substantially all of the fair value of the underlying asset?
PV of Payments & Guaranteed Residual	The present value of the lease payments & guaranteed residual value.
Reasonably Certain Purchase Option?	Does the lease grant the lessee an option to purchase the underlying asset that lessee is reasonably certain to exercise?
Remaining Economic Life (Months)	Enter the number of months remaining on the economic life of the underlying asset at time of commencement.
Residual Value Estimate	Input the estimated residual value of the leased asset. This field is informational to capture information for disclosure reporting. Note that the lease payment schedule below should include in the final month of the lease any estimated payments for the shortfall between the estimated residual value and the residual value guarantee Per the guidance, Lease Payments include: ASC 842: For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see paragraphs 842-10-55-34 through 55-36). IFRS 16:27 (c) amounts expected to be payable by the lessee under residual value guarantees
Residual Value Guarantee	Input the entire residual value guarantee per the lease terms and conditions. This field is informational to capture requirements for disclosure reporting. The ASC master glossary defines a residual value guarantee as “[a] guarantee made to a lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount.”. Lease Payments include: ASC 842: For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see paragraphs 842-10-55-34 through 55-36). IFRS 16:27 (c) amounts expected to be payable by the lessee under residual value guarantees A lessee is only required to include the amounts whose payment is probable in the measurement of the lease liability and ROU asset
Specialized Asset?	Is the asset of a specialized nature and no alternative use to the lessor?
Status	Set the status of the lease to pending when first set up in order to generate schedules. Pending: Tables can be (re)generated, but no journals Commenced: The lease is commenced and ready for journal entries Pending Close Out: The lease is complete pending close out of ROU Asset Balances Complete: The lease has reached termination date Terminated: The lease was terminated early
Transfer of Ownership?	Does the lease transfer ownership of the underlying asset by the end of the lease term?
Non-Lease Payments	NetLease does not currently support non-lease payments such as Common Area Maintenance (CAM). Note that non-lease components are NOT to be included in calculation of the lease payments impacting ROU Asset & Lease Liability.
Variable Rate Index	If the lease contains Variable Lease Payments, select the variable rate index the variable payments of the lease are dependent on. Lease payments below should include variable lease payments that depend on an index or a rate (such as the CPI or a market interest rate), initially measured using the index or rate at the commencement date. (ASC 842-10-30-5 & IFRS 16-27). Note that variable lease payments are made by a lessee to the 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 (ASC 842 & IFRS16). Note that this field is currently informational to support reporting & disclosures.

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Lease Classification