- What is lease liability?
- How to create the lease amortization schedule and calculate your lease liability
- Create five-column spreadsheet
- Enter number periods and cash payments
- Enter expense formula
- Fill expense column
- Enter liability reduction formula
- Enter liability balance formula
- Fill remaining liability balance
- Perform “What-If Analysis” on liability balance
- Set liability balance value to 0 with goal seek
- Click “OK”
This information is important for all companies, not just for companies that plan on continuing to use Excel spreadsheets for lease accounting. Even if you plan to use lease accounting software for compliance with the new standard, you can use the information in this blog to ensure that your chosen software provider is performing this calculation accurately. Transitioning from ASC 840 to ASC 842 can be difficult, but there are resources that can help you gain an understanding of the methods laid out below for our calculations.
What is the lease liability?
The lease liability is defined as the present value of your future lease payments. This is calculated as the initial step in accounting for a lease under FASB ASC 842, and this amount is then used to calculate the ROU (right-of-use) asset, that is recorded in addition to the liability for operating leases and capital leases.
A lessee’s obligation to make the lease payments arising from a lease, measured on a discounted basis.
How to create the lease amortization schedule and calculate your lease liability
Download our free present value calculator to follow along:
Here are the steps to follow to calculate the present value of lease payments and the lease liability amortization schedule using Excel when the payment amounts are different, starting with an example:
Calculate the present value of lease payments for a 10-year lease with annual payments of $1,000 with 5% escalations annually, paid in advance. Assume the rate inherent in the lease is 6%.
Step 1: Create an Excel spreadsheet with these five columns
Create a new Excel spreadsheet and title five columns with the following headers: Period, Cash, Expense, Liability Reduction, and Liability Balance, as shown below:
Step 2: Enter number periods and cash payments
Enter the number periods starting from 0 to 9, and enter the cash payments in each period. Because payments are made in advance, the first payment of $1,000 is made in period 0. The annual payments then escalate at a 5% rate. Please see illustration below:
Step 3: Enter the expense formula
Enter “0” for expense in period 0 (because payments are made in advance). In expense for period 1, enter the cell for the period 0 liability balance and multiply by 6%. See below.
Step 4: Fill the expense column
Copy the formula for expense in period 1 down for the remaining expense columns.
Step 5: Enter the formula for liability reduction
The formula for each liability reduction image is the corresponding cash minus the corresponding expense. See below.
Copy the formula down the entire liability reduction column.
Step 6: Enter the formula for liability balance
Enter “0” for the liability balance in the line above period 0. In liability balance for period 0, enter the cell for the above cell’s liability balance minus the liability reduction in period 0. What you will end up with is the previous liability balance, reduced by the current liability reduction (see below).
Step 7: Fill the remaining liability balance column
Copy the formula for liability in period 0 down for the remaining liability balance columns.
Step 8: Perform “What-If Analysis” on the liability balance
Select the liability balance for period 9. In the top bar in Excel, go to the “Data” tab, then the “What-if Analysis” Tab, then select “Goal Seek.”
Step 9: Set liability balance value to 0 by using goal seek
In the dialog box that follows, make sure the “Set cell” is set to the cell representing the liability balance for period 9, in the “To Value” enter 0, and in the “By Changing Cell” enter the cell representing the liability balance for the period above period 0. See below.
Step 10: Click “OK”
After you click ok, Excel will prepare your amortization schedule for you automatically. See below.
Based on this, the present value of a 10-year lease with payments of $1,000 annually, 5% escalations, and a rate inherent in the lease of 6% is $9,586.
This schedule will help you make your journal entries for the entire life of the lease, if you’re using Excel. If you’re using a lease accounting software, the information above will help you cross-check the calculations performed by your provider so you can ensure accuracy.