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CITY OF PARIS, TEXAS Notes to Financial Statements (Continued) September 30, 2025 1. Summary ofi ei (Continued) .0 G. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (Continued) 7. Leases (Continued) The City is a lessee for noncancellable leases of property and equipment, The City recognizes a lease liability and an intangible right -to -use lease asset at the beginning of a lease in the government -wide financial statements. In general, the lease liability and the right -to -use assets are measured based on the present value of the expected payments during the term of the lease. Remeasurement of a lease liability and right -to -use lease asset occurs when there is a change in the lease term and/or other changes that are likely to have a significant impact on the lease liability. The key estimates and Judgments related to leases include how the City determines the discount rate it uses to discount the expected lease payment,,; to present value, lease term, and lease payments. The City uses the interest rate charged by the lessor as the discount rate. When the interest rate charged by the lessor is not provided, the City generally uses its estimated incremental borrowing rate as the discount rate. The lease term includes the non -cancellable period of the lease. Lease payments included in the measurement of the lease liability are composed of fixed payments and any purchase option price that the City is reasonably certain to exercise. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option or not exercise a termination option. Extension options or periods after termination options are only included in the lease term if the lease is reasonably certain to be extended. Leases with payments that depend on an index or rate, such as the Consumer Price Index or market rate, are initially measured using the index or rate as of the commencement of the lease term. Leases with periodic percentage rent increases or flat rate increases that are specified in the lease terms are included in. the measurement of the lease liability. The City calculates the amortization of the discount on the lease liability and reports that amount as outflows of resources or interest expense for the period. Payments are allocated first to accrued interest liability and then to the lease liability. The City amortizes the right -to -use lease asset on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. However, if a lease contains a purchase option that the City has determined is reasonably certain of being exercised, the lease asset is amortized over the useful life of the underlying asset. If the underlying asset is non -depreciable, such as land, the lease asset is not amortized. The City reports the amortization of the lease assets as an outflow of resources, amortization expense, which is combined with depreciation expense related to other capital assets for financial reporting purposes. The City accounts for the partial or full lease termination by reducing the carrying values of the lease asset and lease liability and recognizing a gain or loss for the difference. However, if the lease is terminated as a result of the City purchasing the underlying asset from the lessor, the lease asset will be reclassified to the appropriate class of owned assets. Leases that are considered a short-term lease (12 months or less), transfers ownership of the underlying asset, assets held as investments, or contain variable payments based on future performance of the City or usage of the underlying assets are not included in the measurement of the lease liability. The City recognizes payments for short-term leases and variable payments as expense in the period in which the City incurs the obligation for those payments. 37