The standard is quite ambiguous regarding variable lease payments and how to account for them. Therefore, we will cover each type of variable lease payment and where to enter them in Cradle.

In summary, if you do not know what the charge will be until invoiced/communicated by the lessor, like many CAM charges, this would meet the definition of the truly variable lease payment and is expensed in the income statement.

To do this in Cradle, select the applicable agreement, then the Modification tab > + Add New Modification > Variable lease payment, and input the charge.

The first thing to clarify is there are essentially two types of variable payments being:

1) Payments based on an index or rate

2) Payments based on revenue or usage

It's important to delineate between these payments. Payments based on an index or rate can be included in the lease liability calculation, while payments based on revenue or usage will never be included in the lease liability calculation:

A payment based on revenue or usage will change with each payment. As a result, it's impossible to include in the future lease payments calculation of the lease liability. Because of this, the standard states these payments are expensed to the income statement.

In Cradle, we refer to payments based on revenue or usage as Variable Payments.

To enter a variable lease payment (payments based on revenue or usage) in Cradle, select the "Modifications" tab, "+ Add New Modification," and then "Variable Payment."

Next are payments based on an index or rate. The most common examples of this are the fixed payments increasing on a future date based on the consumer price index or a market rent review.

These payments fall into the variable lease payment definition because, at the commencement of the lease agreement, the lessee does not know what the increased amount will be. Within Cradle, we specifically call these:

When the lessor communicates these increases, input them in the Modification tab.

Lastly, what about the Initial Recognition tab for payments based on an index or rate?

When measuring the lease liability, it's the known future payments at a point in time. When onboarding a lease, it's the known payment terms at either the commencement of the lease or transition to ASC 842.

As a result, if the rate or index amount is known at commencement or transition, you would capture the payments in the Initial Recognition tab.

If you know the rate or index at Initial Recognition, you have two steps to decide on how to enter it:

1) Is the increase already in effect? e.g., the lease payments increased from $1,000 per month the $1,050 per month? If so, you would simply onboard $1,050 as your fixed payment amount.

2) The increase will occur in the future: If you know what the CPI increase will be in the future, you will enter that as a fixed increase.

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