The answer of how do you calculate present value of lease payments, lies in the core principle of discounting each future lease payment back to its value today using an appropriate discount rate, usually derived from the lessee’s incremental borrowing rate or the implicit rate in the lease.
How Do You Calculate the Present Value of Lease Payments?
The basic formula used is:
PV = ∑ (Lease Payment) / (1 + r)ⁿ,
where
r
is the discount rate and
n
is the period number.
The process involves identifying:
Future lease cash flows throughout the lease term (e.g., monthly or annual payments).
The number of periods over which these payments are made (e.g., years or months).
The appropriate discount rate to reflect time-value of money.
In practice, each lease payment is discounted individually. For instance, a payment at period 0 (start of lease) isn’t discounted; it retains its full nominal value; a payment in period 1 is divided by
(1 + r)¹
, and similarly for subsequent periods.
Summing these discounted values gives the total present value of lease obligations.
In India, especially under Ind AS 116 (Leases), this PV calculation enables recognition of the lease liability and the corresponding right-of-use asset on the lessee’s balance sheet.
A practical approach is to use tools like Excel, where you can apply the built-in PV or NPV functions by entering the discount rate and periodic payments, then summing the results to arrive at the present value.
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Learn how to calculate the present value of lease payments in India using discounting methods under Ind AS 116. The Present Value (PV) of lease payments is the current worth of future lease payments, discounted at an appropriate rate. This calculation is essential under Ind AS 116 (Leases) for financial reporting in India.
PV=∑LP/(1+r)n
Where:
LP = Lease Payment per period
r = Discount rate (Incremental Borrowing Rate or Interest Rate Implicit in Lease)
n = Number of periods
Apply the formula to discount each lease payment to its present value and the total of discounted payments is the present value of lease payments.
Assume:
Rs. 1,00,000 annual lease payment
5-year lease term
Discount rate, n = 8%
Using the formula, discount each payment and sum the values to get the present value.
I hope this helps you in obtaining the present value of lease payments.
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2025-03-27T16:39:12+00:00 2025-03-29T22:08:00+00:00Comment
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