Short-term or long-term — which approach is best for you? Learn the different approaches to calculating the short-term and long-term portion of your lease liability – it’s as easy as 1, 2, or 3.
Under ASC 842, a lessee is required to present lease liabilities for all leases in a similar manner, however, calculation of the short-term and long-term portion of the lease liability will differ based on the chosen approach.
The three approaches
Approach #1:
Calculate the short-term portion of the lease liability by summing the principal to be paid over the upcoming 12 months. The remaining amount is the long-term portion of the liability.
Approach #2:
For all future payments, use the lease liability’s effective interest rate to separately calculate the present value of the lease liability as the long-term portion, and for the short-term portion calculate the present value of the upcoming 12-month payments.
Note: Rate used for the Present Value calculations = 5%
Approach #3:
Calculate the short-term portion of the lease liability by summing the undiscounted payments that are due in the upcoming 12 months. The remaining amount is the long-term portion of the liability.
So, what’s it going to be – 1, 2, or 3?
Here at Netgain, we have chosen to use approach #1 as it most closely resembles the guidance for the presentation of the current portion of long-term debt. The guidance states that the current portion of long-term debt is the amount of principal that will be paid over the upcoming 12 months. As such, Netgain has chosen to treat the lease liability like a loan by reclassifying the upcoming 12-month principal payments as the short-term portion of the lease liability.
