8-4 The Bear Minimum Provision 1 According to 840-10-25-5 (b) it seems that the legal fees being paid by Big Bear for Goliath Co. would be excluded from the minimum lease payment. Reading further in 840-10-25-6 (e) it says “Fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction. Such fees shall be included as part of minimum lease payments” so you would include these fees paid by Big Bear for the structuring the lease. In the Intermediate
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Accounting for Leases under IFRS Lease classification A lease is an agreement between lessor and lessee, whereby the lessor passes to the lessee the right to use an asset for an agreed period of time in return for a payment or series of payments. Under IFRS IAS (17) Leases we recognize two types of leases, finance and operating: IAS 17, paragraph 8: “A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as
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840-10-25-6 If the lease contains a bargain purchase option, only the minimum rental payments over the lease term and the payment called for by the bargain purchase option shall be included in the minimum lease payments. Otherwise, minimum lease payments include all of the following: a. The minimum rental payments called for by the lease over the lease term. b. Any guarantee by the lessee (including by a third party related to the lessee) of the residual value at the expiration of the lease term, whether
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entered a 10 year non-cancelable lease with Goliath Company for a combustion turbine. The lease is signed on December 15, 2010 and the right to use the turbine begins on January 1, 2011. Relevant Issues and Case Facts The case focuses on whether certain costs and provisions associated with the lease would be included in “minimum lease payments” under ASC 840 under leases. There are three specific provisions under question: legal fees paid in negotiating the lease contract, a possible penalty paid
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British company that applies IFRSs) and Lessor Inc. had a lease agreement starting on January 1, 2007 which Lessee Ltd. rents equipment from Lessor Inc. for three years. The remaining useful life of the equipment is four years. The fair value of the equipment is $265,000. At the end of the lease term, Lessee Ltd. has guaranteed $20,000 as the residual value. The agreement contains no purchase or renewal options, which means at the end of the lease term, Lessee Ltd. needs to return this equipment to Lessor
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a building to Brill under an operating lease for ten years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For year 1, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for year 1 should be a. $27,500 b. $29,000 c. $35,000 d. $36,500 3. (a) Net rental income on an operating lease is equal to rental revenue less related
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Case Study 2: The Bear Minimum 1. Big Bear would not include the $500,000 in legal fees paid to Stipe, Berry, Black, and Mills LLP as apart of its minimum lease payments, but would include the $1,000,000 of legal fees paid to Goliath. This conclusion can be drawn from two separate parts of FASB Codification on Leases. According to ASC-840-10-25-5, “…minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make during in connection with the leased
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fair lease value payments ** present value of an ordinary annuity of $1: n=10, i=11% (b) $101,881 x 5.88923** = $600,000* lease leased asset/ payments lease liability * rounded ** present value of an ordinary annuity of $1: n=10, i=11% Situation 2 (a) $980,000 ÷ 9.12855** = $107,355 fair lease value payments ** present value of an ordinary annuity of $1: n=20, i=9% (b) $107,355 x 9.12855** = $980,000‡ lease leased
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each calendar year after 2011, Cascade will pay minimum rent in an amount equal to $1 million increased (but not decreased) by the same percentage as the increase in the consumer price index (CPI). Thus, the problem here is whether the $1 million rent and the probable increased rental fees (due to increase in the CPI) should be included in minimum lease payments. According to FASB ASC paragraph 840-10-25-5, “minimum lease payments comprise the payments that the lessee is obligated to make or can be
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included in the lessee’s minimum lease payments.”2 The external legal counsel fee of $500,000 that Thurber paid to Stipe, Berry, Mills and Buck LLP in connection with negotiating the lease agreement are executory cost because they are all third parties that guarantee for the lease agreement. They are not involved in the lease term. Thurber will have to recognize these costs as expenses. However, the $1 million of legal fees paid to Goliath will be included in the minimum lease payment. Under ASC 840-10-25-6
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