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Lease classification

See LG 5.3.1 for information on when to remeasure lease payments, including the impact of variable
lease payments on remeasurement.

Example 3-8, Example 3-9, and Example 3-10 illustrate when to include variable lease payments in the
calculation of lease payments when classifying a lease.

EXAMPLE 3-8
Lease payments – variable lease payments tied to an index

Lessee Corp enters into an agreement with Lessor Corp to lease office space for a term of 60 months.
Lease payments during year one of the lease are $10,000 per month. Each year, lease payments
increase by an amount equivalent to the percentage increase in the Consumer Price Index (CPI). For
example, if the CPI increases by 3%, lease payments during year two of the lease would increase 3% to
$10,300 per month. If the CPI decreases or remains consistent, lease payments remain at the rate in
effect during the previous year.

What are the lease payments for purposes of classifying the lease?

Analysis

Increases in lease payments are tied to the percentage change in the CPI and movements in the CPI
subsequent to lease commencement are unknown. As such, only the initial lease payments of $10,000
per month would be included in the calculation of lease payments when classifying the lease.

See Example 4-6 for an example of the initial measurement of a lease with a variable lease payment
tied to an index.

EXAMPLE 3-9

Lease payments – variable lease payments tied to real estate taxes

Lessee Corp and Lessor Corp enter into a 10-year lease of an office building for fixed annual lease
payments of $85,000. Per the terms of the lease agreement, Lessee Corp is required to pay all real
estate taxes associated with the building during the lease term. Real estate taxes are expected to be
$15,000 for the first year of the lease.

What are the lease payments for purposes of classifying the lease?

Analysis

The lease payments are $85,000. Although the terms of the lease require Lessee Corp to pay the real
estate taxes, they are costs Lessor Corp would owe regardless of whether the underlying asset is leased;
therefore, the payments represent a reimbursement of Lessor Corp’s costs, which are associated with
the right to use the office building. However, since real estate taxes vary on an annual basis, they
would be considered variable lease payments that are not dependent on an index or a rate. As a result,
they should be excluded from lease payments for purposes of classification and measurement.

As discussed in Example 3-7, real estate taxes do not represent a separate lease component. See LG 2.4
for additional information on identifying lease and nonlease components.

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