Lease liability

A lease liability is the present value of unpaid lease payments at commencement, updated through interest, cash payments, and required remeasurement. Finance and operating lessee models use the same basic liability mechanism.

Reconcile every period

Start with the approved payment dates and discount rate. For each period, interest equals the opening liability times the periodic rate. Principal equals the cash payment less interest. The ending liability equals the opening liability plus interest less cash. Preserve full precision and use the final settlement as a control. For current classification, identify principal due during the next 12 months rather than labeling the full next payment as current.

Suppose five year-end payments of $25,000 are discounted at 8 percent. The opening liability is the present value of those unpaid amounts. After one year, interest is added and the $25,000 cash payment reduces the balance. An operating lease still follows this effective-interest rollforward; its single lease cost does not equal liability reduction.

Undiscounted maturity payments exceed the recorded liability because the maturity table includes future interest. Read initial measurement in ASC 842-20-30-1 through 30-3 and subsequent liability measurement in ASC 842-20-35-1.