need to know / leases - project update - BDO International

20 LEASES - A PROJECT UPDATE
AMOUNTS INCLUDED IN LEASE PAYMENTS
Variable lease payments
Variable lease payments are payments that arise under the contractual terms of a lease because of changes in facts or
circumstances occurring after the date of inception of the lease, other than the passage of time. For example, increases in
lease payments might be linked to a benchmark interest rate, and some retail property lease payments are linked to the
value of the lessee’s sales that are made from the leased property.
Some variable lease payments would not be included in the measurement of the right-of-use asset, the lessee’s lease liability
and the lessor’s receivable. However, the following variable lease payments would be included:
1. Lease payments that are in-substance fixed lease payments, but are structured as variable lease payments in form.
2. Lease payments that depend on an index or a rate (for example, a lease where future increases in lease payments are
linked to a benchmark interest rate). These would be included in the lessee’s liability to make lease payments and the
lessor’s right to receive lease payments in the following way:
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Lease payments that depend on an index or a rate would be initially measured using the index or rate that exists at
commencement of the lease.
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Lease payments that depend on an index or a rate would be reassessed using the index or rate that exists at the end of
each reporting period.
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Lessees would reflect changes in the measurement of lease payments that depend on an index or a rate in net income
to the extent that those changes relate to the current reporting period and as an adjustment to the right-of-use asset to
the extent that those changes relate to future reporting periods.
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Lessors would recognise changes in the receivable due to reassessments of variable lease payments that depend on an
index or a rate immediately in profit or loss.
The proposals are expected to include guidance for the subsequent measurement of a lessor’s residual asset, in
circumstances where a lease contract includes variable lease payments that are excluded from the lease receivable at the
lease commencement date:
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If the rate the lessor charges the lessee does not reflect an expectation of variable lease payments, the lessor would not
make any adjustments to the residual asset with respect to variable lease payments. This is because the amounts allocated
to the portion of the leased asset that is derecognised on lease commencement, and therefore the amount allocated to
the residual asset, will not be affected by any estimates of future variable lease payments. The effect of variable lease
payments would be reflected in net profit or loss for the period.
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If the rate the lessor charges the lessee does reflect an expectation of variable lease payments, the lessor would adjust the
residual asset on the basis of the variable lease payments that are actually received in each reporting period. This would
be achieved by recognising a portion of the cost of the residual asset as an expense when variable lease payments are
recognised in profit or loss.
BDO comment
It might not seem entirely clear why a distinction is made between the two scenarios set out above. However, the rationale for
this adjustment is that when a lessor does expect to receive variable lease payments, the ‘base’ amount (excluding any variable
amount) that the lessor charges is less than the expected actual lease income. As a consequence, because the lease income
used for the purposes of the lessor’s accounting will exclude variable receipts, a smaller amount is allocated to the portion
of the leased asset disposed of, with the residual asset carrying amount being correspondingly higher. The adjustment to the
residual asset for variable lease payments actually received therefore acts as a ‘true up’ of the residual asset carrying value for
each reporting period. Because no adjustment is made to the residual asset on commencement of the lease to reflect expected
variable lease income, no adjustment would be made to the residual asset for any difference between actual variable lease
payments and the amounts that the lessor expected to receive at the lease commencement date.