What are 'Minimum Lease Payments'
Minimum lease payments are the lowest amount that a lessee can expect to make on a lease over its lifetime. Accountants calculate minimum lease payments in order to assign a present value to a lease. The method of calculating minimum lease payments is laid out in the Statement of Financial Accounting Standards No. 13 (FAS: 13), which was published by the Financial Accounting Standards Board in 1980.
BREAKING DOWN 'Minimum Lease Payments'
Although common sense suggests that the minimum lease payments on a 12-month lease at $1,000 a month should be $12,000, this number can be complicated by contractual clauses. Although executory costs like maintenance and insurance are usually excluded because they are the responsibility of the lessor, several factors can be add to the cost of a lease. These include any guarantees made by the lessee to the lessor about the residual value of the leased property at the end of the lease as well as any payments for non-renewal of the lease. Once these are factored in, a reasonable present value can be assigned to the lease for accounting purposes.
Accounting for minimum lease payments differs from the perspectives of the lessee and lessor. To learn more about this subject, read the original document available from the FASB.