7/5/2021 How to Calculate the Present Value of Future Lease Payments

How to Calculate the

Present Value of Future
Lease Payments
Executive Summary

All leases including operating leases must now be present valued and will
be recognized on the balance sheet

The standards setters do not implicitly state a specific formula to apply

when calculating the present value of future lease payments

There are three present functions available in Excel: 

- PV: present value future inflows or outflows amounts based on periods
- NPV: present values future amounts in which the NPV function
automatically assumes all the time periods are equal
- XNPV: uses specific dates that correspond to each amount being
discounted in the series

Other present value methods: It can get incredibly granular. The XNPV used
in Excel does not adhere to the standards setters at the IASB (IFRS 16) as
the day count convention (how you calculate interest based on the
discount rate input) is 365/fixed as opposed to Actual/Actual

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 1/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

The most accurate present value formulas/function will take into

consideration the date the payments occur

How to calculate the present value

There are many ways to skin a cat. With lease accounting, how you present
value your lease liability is no exception. This is a critical area of the standard
and is susceptible to manual error. Not to mention the right-of-use asset is
derived from the lease liability. If your lease liability present value calculation is
incorrect, so is the right-of-use asset value. 

The objective of this document is to:

1. Clarify what "present value" means

2. How to apply present value concepts in Microsoft Excel to lease accounting

3. Discuss what's the best present value calculation methodology. 

The topics we're about to cover are especially vital if you're going to calculate
your lease liability in Microsoft Excel manually. Not to mention if you've opted
with a lease accounting solution, you may want to recalculate your numbers for
peace of mind.

What does the standard say? 

Before going any further, what do the applicable standards state concerning
how to present value a lease liability? 

IFRS 16:

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 2/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

At the commencement date, a lessee shall measure the lease liability at

the present value of the lease payments that are not paid at that date. The
lease payments shall be discounted using the interest rate implicit in the lease, if
that rate can be readily determined.

US GAAP ASC 842: 

The lease liability is the present value of the lease payments not yet paid,
discounted using the discount rate for the lease at lease commencement.

As per the above, the standards provide no more detail then the lessee must
present value the lease payments.

What does present value mean?

Present value 

It’s essential to understand the time value of money concept. A dollar today
isn’t worth the same as a dollar tomorrow. This is at the core of IFRS 16 and
ASC 842, the future lease cash outflows are present valued to represent the
value of the lease liability at a particular point in time.

Common present value calculation attributes 

When calculating the present value of the future lease payments regardless of
the methodology, all calculations will require:

Discount rate: the rate used that will present value the future lease
payments

Future cash flows: all calculations require a future set of cash flows (lease
payments); these are the amounts that will be present valued. 
https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 3/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

Is present value the same as net present value? 

Investopedia describes the difference as the following: 

Present value (PV) is the current value of a future sum of money or stream of

cash flow given a specified rate of return. Meanwhile, net present value
(NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time.

The main difference between PV and NPV is the NPV formula accounts for the

initial capital outlay required to fund a project, making it a net figure, while the
PV calculation only accounts for cash inflows.

So the difference is how you use the formula. A net present value includes both
outflows and inflows of cash, while a present value only includes inflows or
outflows. 

Present value formulas in Microsoft Excel: 

Many mathematical formulas can be used to calculate the present value of a

figure. For this article we’ll only cover those offered in excel which are: 

Present Value

Net Present Value 

XNet Present Value

To display the impact of using each excel function, the same lease example will
be used: 

A lessee signs into a contract noting the following details: 

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 4/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

The lease commencement date is on January 1, 2020, in which the lessee

pays in advance at the start of every year. 

The lease term is for 10 years 

The lease payments start at $1,000 per annum and increase 5% each year.

The lessee determines the incremental borrowing rate/discount rate of 6%

Present Value

FV / (1 + r)n

Where

FV is the future value

r is the required rate of return 

n is the number of periods

When you use the PV function in excel it details the arguments used in the
function

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 5/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 6/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

Rate: The interest rate per period. For example, if you obtain an automobile
loan at a 10 percent annual interest rate and make monthly payments, your
interest rate per month is 10%/12, or 0.83%. You would enter 10%/12, or 0.83%,
or 0.0083, into the formula as the rate.

Nper: The total number of payment periods in an annuity. For example, if you
get a four-year car loan and make monthly payments, your loan has 4*12 (or
48) periods. You would enter 48 into the formula for nper.

Pmt: The payment made each period and cannot change over the life of the
annuity. Typically, pmt includes principal and interest but no other fees or
taxes. For example, the monthly payments on a $10,000, four-year car loan at
12 percent are $263.33. You would enter -263.33 into the formula as the pmt. If
pmt is omitted, you must include the fv argument.

FV: The future value or a cash balance you want to attain after the last payment
is made. If fv is omitted, it is assumed to be 0 (the future value of a loan, for
example, is 0). For example, if you want to save $50,000 to pay for a special
project in 18 years, then $50,000 is the future value. You could then make a
conservative guess at an interest rate and determine how much you must save
each month. If fv is omitted, you must include the pmt argument.

Type: The number 0 or 1 and indicates when payments are due.

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 7/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

How is that number calculated? 

As illustrated in the screenshot you will need to:

Add the future cash flows due to the lessor

Add the period the cash flows are in relation to in this case 0 to 9

Decide on a discount rate to present value the future payments in this

example 6%

Each individual period is present valued and the total sum of those figures
equals $9,585.98. 

The key input in this present value excel function is each payment is given a
period. The first period is 0, which results in the present value amount of $1,000
given it’s not a future amount. On the other hand in period 1 the present value
of 1,050 is $990.57. 

This illustrates how important the period is or “Nper” is in excel, bearing in

mind this is a period input as opposed to a date input.

Net Present Value

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 8/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

R1/ (1+i)1 + R2/(1+i)2 + R3/(1+i)3

In reference to the NPV formula above:

 R1 = Net Cash flow in period one, R2 = Net Cash flow in period two, R3=
Net Cash flow in period three and i = the discount rate. 

Using the same fact pattern as the example used for the PV formula in excel it
looks like this:

Unlike the PV function in excel, the NPV function/formula does not consider
any period. The function automatically assumes all the time periods are equal.

The total if you included the $1,000 on day 1 is $9,043.37. Technically you
should not present value a figure on day 0 as there’s no impact of the time
value of money. 

When you present value all future payments and add $1,000 to the NPV
amount, the total is $9,585.98 identical to the PV formula. 

XNPV 

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 9/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

where:

di = the ith payment date

d1 = the 0'th payment date

Pi = the ith payment

The last present value formula available is also the most accurate. The XNPV
function requires one more input when compared to NPV being the date of the
future lease payment.

When using an XNPV function in excel, the present value of the future
payments is $9,583.71 resulting in a $2.26 difference between the NPV & PV
methodology when recording the lease liability on the balance sheet. In this
particular example, the present value amount is relatively small. The difference
between the two functions will be more significant when a more substantial
sum is present valued. Regardless of this fact, from an auditor's perspective,

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 10/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

they will not raise an audit difference based on the present value function
selected.

Which methodology should I use? 

Here we discuss some options that are available to you.

NPV

Positives:

The most straightforward calculation to perform, the only inputs required

are: 
- Discount rate 
- Future cash flows

Audit firms will likely use the same methodology

Negatives:

The least accurate method:

- Automatically assumes all the time periods are equal
- One-off payments, modifications mid-month will not be present valued
accurately

PV

Positives:

Provides a higher level of accuracy compared to NPV

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 11/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

Negatives:

Time-consuming to correctly allocate the periods, e.g. in period 11.25, there

is a CPI increase. Using a date methodology is far quicker.

XNPV

Positives:

The most accurate as it present values each payment based on the date the
payment occurs.

Incredibly flexible can be done daily calculations.

Negatives:

It can be more time consuming compared to NPV to get the added

accuracy.

The function is not as well known as the NPV function.

Conclusion

Given the ease and that audit firms themselves use the same methodology
when calculating a lease liability majority of companies will use an NPV
calculation. This works for straightforward lease accounting scenarios. However,
it will not be able to handle irregular payments to the same accuracy as XNPV. 

Bonus section - why when I calculate the IFRS 16 Illustrative example in

Microsoft Excel, using a daily XNPV function, it does not agree to the
standard’s examples? 

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 12/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

The difference is driven by the way Microsoft Excel’s XNPV calculation formula
works. The XNPV function assumes interest on the lease liability is calculated
based on 365 days a year as opposed to the actual days occurring in the
calendar year. This calculation methodology is called actual 365/fixed. In the
IFRS 16 Illustrative examples, the calculation methodology is slightly different.
They use Actual/Actual ISDA, which calculates interest based on how many
actual days in a year. For example, the year 2020 has 366 days. This is what is
driving the difference between the Microsoft Excel numbers and that of the
standard setters.

Here at Cradle, our mission is simple; it's at the foundation of everything that we do. We want to
make accountants' lives easier by leveraging technology to free up their time to focus on running
the business.

PRODUCT CONTACT

Home E-mail

Pricing +1 (888) 738-8030

ASC 842 Software Book a Demo

IFRS 16 Software
LEGAL
Login
Privacy Policy
Sign Up
Terms & Conditions

RESOURCES Cookie Policy

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 13/14
7/5/2021 How to Calculate the Present Value of Future Lease Payments

ASC 842 Guide

IFRS 16 Guide

GASB 87 Guide

Insights

© 2021 Cradle, Inc. All rights reserved.

https://www.cradleaccounting.com/insights/how-to-calculate-the-present-value-of-future-lease 14/14