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Lease classification

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

Analysis

The lease payments for purposes of classifying the lease are the fixed monthly payments of $10,000
plus the minimum annual increase of 3%.

Lessee Corp is required to pay no less than a 3% increase regardless of the level of sales activity;
therefore, this minimum level of increase is an in substance fixed lease payment.

EXAMPLE 3-13

Lease payments – payments tied to use of medical device consumables

Lessee Corp enters into a three-year lease for a medical device with Lessor Corp. Annual fixed lease
payments are $100,000. Lessee Corp is also required to purchase at least $1 million of consumables to
be used in the operation of the medical device by the end of the lease term. If Lessee Corp does not
order $1 million of consumables, it is required to make a shortfall payment equal to the difference
between the total consumables purchased and $1 million.

The measurement and allocation of contract consideration are not addressed in this example. For
simplicity, assume all payments are allocated to the lease component (i.e., the medical device).

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

Analysis

The lease payments for purposes of classifying the lease include both the $300,000 fixed lease
payments (3 years × $100,000 per year) and the in-substance fixed lease payment of $1 million for
consumables.

Although the payment for consumables varies based on use, because Lessee Corp is required to make
payments of at least $1.3 million regardless of its consumable use, the $1 million minimum payment is
an in substance fixed lease payment.

See Question 3-12 for information on the differences between payments included in lease payments
and payments included in contract consideration. See LG 2.4 for information on measuring and
allocating contract consideration to identified lease and nonlease components.

EXAMPLE 3-14

Lease payments – protective rights

Lessee Corp enters into a 5-year lease for equipment with Lessor Corp. The arrangement provides that
Lessor Corp will maintain the equipment and operate it in accordance with instructions provided by
Lessee Corp.

Payments due from Lessee Corp to Lessor Corp are based on the daily operation of the equipment (i.e.,
performance-based rates assigned to the nature of the activities performed each day throughout the
term of the contract) as follows:

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