In short
Variable lease payments are lease payments that change because of facts or circumstances after commencement. Those that depend on an index or rate are included in the lease liability; those based on performance or usage are expensed as incurred.
Key takeaways
- Index- or rate-based payments are measured using the index or rate at commencement; later changes are recognized as they occur.
- Payments based on sales or usage, such as a percentage of a store's revenue, are left out of the liability.
- Fixed payments in substance are treated as fixed, even if labeled variable.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?