Lease Liability
A lease liability is a lessee's obligation to make lease payments, measured at the present value of the lease payments not yet paid.
Leasing
Explanation
Lease payments included in the measurement typically are:
• fixed payments, less lease incentives receivable,
• variable payments that depend on an index or rate,
• amounts expected under residual value guarantees,
• the exercise price of purchase options reasonably certain to be exercised,
• termination penalties, if the lease term reflects termination.
Payments are discounted using the interest rate implicit in the lease if it is readily determinable; otherwise, the lessee uses its incremental borrowing rate. Under ASC 842, entities other than public business entities may elect a risk-free rate.
After commencement, the liability increases with interest and decreases with payments. It is remeasured when, for example, the lease term changes, the assessment of a purchase option changes, or index-based payments change (under IFRS 16).
Why It Matters
Lease liabilities affect leverage, covenants, and key financial ratios. Calculating and remeasuring them for large portfolios requires reliable contract data and systems – in SAP typically SAP Contract and Lease Management (CLM).
Related Terms
Right-of-Use Asset · Interest Rate Implicit in the Lease · ASC 842 · IFRS 16 · Incremental Borrowing Rate (IBR) · Lease Term
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