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CITY OF PARIS, TEXAS <br />Notes to Financial Statements (Continued) <br />September 30, 2022 <br />L Summary of Significant Accounting Policies (Continued) <br />G. Assets, Liabilities, and Equity (Continued) <br />6. Leases (Continued) <br />City as Lessor (Continued) <br />The key estimates and judgments related to leases include how the City determines the discount rate it uses to <br />discount the expected lease payments to present value, lease term, and lease payments. The City uses its <br />estimated incremental borrowing rate as the discount rate for leases, unless the rate is stated in the lease <br />agreement. The lease term includes the noncancellable period of the lease. Lease payments include the <br />measurement of the lease receivable are composed of fixed payments from the lessee. Leases with periodic <br />percentage rent increases or flat rate increases that are specified in the lease terms are included in the <br />measurement of the lease receivable. <br />The City calculates the amortization of the discount on the lease receivable on a straight-line basis over the <br />term of the lease and reports that amount as an inflow of resources for the period. Any payments received are <br />allocated first to the accrued interest receivable and then to the lease receivable. This recognition does not <br />apply to short-term leases, contracts that transfer ownership, leases of assets that are investments, or certain <br />regulated leases. <br />The City accounts for the partial or full lease termination by reducing the carrying values of the lease <br />receivable and related deferred inflow of resources, and recognizing a gain or loss for the difference. <br />However, if the lease is terminated as a result of the lessee purchasing an underlying asset from the City, the <br />carrying value of the underlying asset should be derecognized and included in the calculation of any resulting <br />gain or loss. <br />Leases that are considered a short-term lease (12 months or less) are not included in the measurement of the <br />lease receivable. The City recognizes short-term lease payments as revenues based on the payment provisions <br />of the lease contract. Liabilities are only recognized if payments are received in advance, and receivables are <br />only recognized if payments are received subsequent to the reporting period. <br />Citv as Lessee <br />The City is a lessee for noncancellable leases of property and equipment. The City recognizes a lease liability <br />and an intangible right -to -use lease asset at the beginning of a lease. In general, the lease liability and the <br />right -to -use assets are measured based on the present value of the expected payments during the term of the <br />lease. Remeasurement of a lease liability and right -to -use lease asset occurs when there is a change in the <br />lease term and/or other changes that are likely to have a significant impact on the lease liability. <br />The key estimates and judgments related to leases include how the City determines the discount rate it uses to <br />discount the expected lease payments to present value, lease term, and lease payments. The City uses the <br />interest rate charged by the lessor as the discount rate. When the interest rate charged by the lessor is not <br />provided, the City generally uses its estimated incremental borrowing rate as the discount rate. The lease term <br />includes the noncancellable period of the lease. Lease payments included in the measurement of the lease <br />liability are composed of fixed payments and any purchase option price that the City is reasonably certain to <br />exercise. In determining the lease term, management considers all facts and circumstances that create an <br />economic incentive to exercise an extension option, or not exercise a termination option. Extension options or <br />periods after terminations options are only included in the lease term is the lease is reasonably certain to be <br />extended. Leases with payments that depend on an index or rate, such as the Consumer Price Index or market <br />rate, are initially measured using the index or rate as of the commencement of the lease term. Leases with <br />periodic percentage rent increases or flat rate increases that are specified in the lease terms are included in the <br />measurement of the lease liability. <br />36 <br />