Variable lease payments

Variable lease payments, as defined at Appendix A of AASB 16 Leases (AASB 16), are the portion of payments made by a lessee to a lessor for the right to use an underlying asset during the lease term that varies because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

Worksheet E in Example lease journals illustrates accounting for variable lease payments.

Market reviews during lease term

Some leases have fixed annual increases over the lease term with one or more intervening market reviews – under AASB 16, these are variable lease payments.

AASB 16 extract:
Paragraph 28: Variable lease payments that depend on an index or a rate described in paragraph 27(b) include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate (such as LIBOR) or payments that vary to reflect changes in market rental rates.
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

Under paragraph 27(b) of AASB 16, lease liabilities should initially be measured incorporating variable lease payments at the rate applicable at commencement date (as described in paragraph 28 of AASB 16). Future changes to variable lease payments linked to an index, such as the Australian Consumer Price Index, should not be estimated at lease commencement.

Under paragraphs 36(c) and 42(b) of AASB 16, lease liabilities should be re-measured to reflect revised lease payments only when there is a change in the cash flows (i.e. as a result of a change in index or rate), using the same discount rate. This may require re-measurement of the lease liability each year as the index changes.

A lessee shall determine the revised lease payments for the remainder of the lease term based on the revised contractual payments. Under:

  • paragraph 43 of AASB 16, in applying paragraph 42 of the AASB 16, a lessee shall use an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates. In that case, the lessee shall use a revised discount rate that reflects changes in the interest rate.
  • paragraph B42(c) of AASB 16, where there are more than one set of lease payments under a lease agreement that a lessee could realistically be required to make, the lessee should use the lowest realistically possible lease payments in measuring the lease liability.
Note 9: Market reviews during lease term

Measurement of the initial lease liability may depend on the specific terms of the market review adjustment in the lease agreement. Where lease payments in the market review year remain at the previous year’s rate until the market adjustment is agreed, Commonwealth entities must incorporate all fixed annual rate changes, both before and after market review dates, in the initial measurement of the lease liability. Market review lease payment adjustments must not be incorporated in the measurement of lease liabilities until they become effective.

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