When applying the new lease standard (ASC 842), many financial professionals are confused about how to calculate the present value of lease payments, especially when the payment amount depends on actual usage. This article uses a common scenario as an example to clarify the relevant calculation approach and invites peers to share insights.

Problem Background: Variable Lease Payments Based on Usage

Assume a company leases a copier, and the lease agreement stipulates a fixed monthly payment of $8,500, but also specifies that if the number of copies in a month exceeds 75,000, an additional $0.25 per extra copy must be paid. In this case, determining the payment amount used to calculate the present value of the right-of-use asset becomes a key issue.

Basic Principles under ASC 842

According to ASC 842, the present value of lease payments should be based on the definition of "lease payments." Generally, fixed payments (such as the monthly $8,500) should be included in the present value calculation. However, whether variable payments based on usage (such as excess fees) should be included depends on whether they are variable payments "dependent on an index or rate" or variable payments "based on usage." ASC 842 clarifies that variable payments based on usage (e.g., calculated as a percentage of sales or usage) are typically not included in the lease liability but are recognized in profit or loss when actually incurred.

Therefore, for the above case, the fixed monthly amount of $8,500 should be included in the present value of the lease liability. The excess fee ($0.25 per copy) is a variable payment based on usage and, unless the fee can be reasonably determined at the lease commencement date (e.g., there is a clear expectation based on historical usage), it should not be included in the initial measurement. However, if the contract includes a minimum payment amount or a floor clause, it should be handled according to the guaranteed amount.

Treatment of Maintenance Fees

If the lease agreement includes maintenance fees, their nature needs to be distinguished. If the maintenance fee is a separate service, it should be separated from the lease payments and not included in the lease liability. If the maintenance fee is inseparable from the lease, it should be treated as a lease payment. In practice, it is usually allocated based on relative standalone value proportions or according to explicit contract terms.

Note: The above analysis is only a general discussion; specific treatment should consider contract terms and company policies, and professional audit or accounting advisors should be consulted.

In summary, under ASC 842, when calculating the present value of lease payments, one should first identify which payments are fixed or reasonably determinable and which are purely variable payments based on usage. For the latter, they are typically not included in the initial measurement but should be recognized as expenses when incurred. The treatment of maintenance fees needs to be evaluated separately.

We welcome peers to share practical cases or further insights to help improve understanding in this area.