Minimum Lease Payment
Candlefocus EditorThis means that 90% of the asset’s cost should be accounted for in the lease payments within the current period. Companies often use minimum lease payments to determine their leasing contracts and allocate the costs associated with them. Minimum lease payments are reported on investor statements as a form of long-term debt, which can affect their ability to obtain financing and other optionality metrics.
Minimum lease payments are often used to finance operating leases, where lessees have the right to use the leased asset but not the option to buy it. This type of lease computation is used by businesses frequently as it allows lessees to use the asset without owning it. Generally, businesses need to determine the reasonable probability of recovering their initial investment through the lease payments, which makes the 90% test the optimal choice to consider.
It is important for lessee’s to note that their minimum lease payment does not necessarily reflect the actual payment amount, which could be lower or higher depending on their specific budget. This highlights the importance of working with experienced financial advisors to ensure that any leasing contracts a business decides to enter into will satisfy their objectives.
In conclusion, minimum lease payments are an important factor for companies to consider when entering into an asset-leasing agreement. The 90% test for asset recovery is employed in order to discount future lease payments and account for the time value of money. Minimum lease payments are often used to finance operating leases, as they give lessees the right to use the asset, but not to own the asset itself. Businesses need to be aware that the minimum lease payments may not necessarily reflect the actual payments due, and should work with experienced advisors to ensure they understand the terms of the leasing agreement and that they are satisfied with their agreement.