What is the Present Value of Lease Payments?

Present value (also referred to as PV) of lease payments, is a financial calculation that measures the worth of a future sum of money. A future sum of money being a stream of payments given a specified return rate over a given time, according to My Accounting Course. With our Occupier present value calculator excel template, you can start working through your amortization schedules.

Lessees are required to calculate the present value of any future lease payments and record those financial obligations on the balance sheet for both finance and operating leases. The present value calculation defines the lease liability for a given lease. 

In its essence, present value states that a dollar today does not have the same worth as a dollar tomorrow. In fact, the present value is typically less than the future value. So, when determining the lease liability and ROU asset, the future lease cash flows must undergo the present value calculation. 

How do ASC 842 and IFRS 16 define the present value of lease payments?

Under both ASC 842 and IFRS 16, lessees record a right-of-use asset and lease liability at lease commencement measured at the present value of future lease payments, using the rate implicit in the lease or the incremental borrowing rate.

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Under both standards, lessees record, regardless of the lease classification, a right-of-use asset and lease liability at the lease commencement date. The initial right-of-use asset and lease liability is measured based on the present value of the lease payments (as defined in the standards) using the interest rate implicit in the lease (unless the rate cannot be readily determined, in which case the incremental borrowing rate of the lessee will be used).

14.1.3.1 Lessee accounting – Balance sheet (ASC 842 and IFRS 16)

How do you calculate the present value of lease payments?

The present value of lease payments is calculated by discounting each future lease payment back to today's value using the appropriate discount rate and the number of periods remaining in the lease term.

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The Present Value Formula - An Equation

Present Value Calculation - Download our Excel Template Here.

• PV = Present Value
• CF = Future Cash Flow
• r = Discount Rate
• t = Number of Years

What inputs do you need to calculate the present value of lease payments?

Two key inputs drive the present value calculation: the discount rate and the future lease payment stream.

• Discount Rate  - the rate implicit in the lease whenever that rate is readily determinable. Read more here on How to Determine the Discount Rate Under ASC 842
• Lease Payments - The future cash flows (ie. lease payments) are necessary so that these payments can be present valued

How do you use the present value calculator Excel template?

The Occupier present value calculator template provides pre-built headers and formulas so real estate and finance teams can input lease data and generate accurate present value calculations without building the model from scratch. For those who prefer Excel, our spreadsheet will help you with accurate present value calculations.

Check out our Present Value Calculator Excel Template here:

How do you complete the present value calculation step by step?

Completing the present value calculation requires three inputs: the annual discount rate, periodic payment amount, and whether payments are made at the beginning or end of each period.

Step 1:
After downloading our Present Value Calculator Template above, you’ll find that the excel headers and formulas are already created for you. If you haven’t done so already, download the Excel File linked in the image above. 

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Step 2:
Now you can input your lease data. That includes the annual discount rate, the periodic discount rate, the periodic payments. Lastly, you’ll need to indicate if the payments are made at the beginning or the end of the month. In our example below, the inputs are as follows:

• Annual Discount Rate: 5.50%
• Period Discount Rate: .46%
• Periodic Payments: Monthly
• Payments Made: Beginning of the month

Step 3:
If you downloaded the spreadsheet above, you’ll see that the file is preset with a particular example. We are assuming a 5 year term with $100.000 monthly lease payments all made at the beginning of the month. For your purposes, you can go ahead and update the periods with your lease term and the monthly lease payment price. 

One Step Closer to Accurate Lease Liabilities