The Bare Minimum

Topics: Lease, Inflation, Renting Pages: 4 (1138 words) Published: April 30, 2013
The Bare Minimum

Overall Case Facts
Big Bear Power (Big Bear) must determine what factors should be included in the minimum lease payments for the lease of a combustion turbine from Goliath Co. For each of the following three provisions, we determine what components should be included in “minimum lease payments” per ASC 840.

Provision 1
At the beginning of the lease, Big Bear pays $500,000 to its legal counsel as well as $1 million in legal fees incurred by Goliath Co. The Company is required to pay the latter expense, but not the former.

1. Include both of the legal costs in the minimum lease payments 2. Include neither of the legal costs
3. Include one but not the other legal cost

Accounting Literature/Recommendation
There are two sections of the Codification to consider for this provision. The first is ASC 840-10-25-5, which states that the minimum lease payments should only include “payments that the lessee is obligated to make or can be required to make in connection with the leased property” (emphasis added). The second is ASC 840-10-25-6, which further expands upon this by stating that items includable in minimum lease payments are (d) “payment[s] made before the beginning of the lease term” and (e) “fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction”. Because the $1 million legal fee payment is required, made before the lease term begins, and paid to Goliath, the owner of the special purpose entity, we determine that it should be included in the minimum lease payments. However, because the $500,000 paid to Big Bear’s legal counsel is neither required by nor paid to Goliath, we determine that it should not be included in the minimum lease payments.

Provision 2
Big Bear will be required to pay a penalty if Big Bear’s bank declares a default (this is a customary provision in leasing arrangements). The Company will be in default if there is a...
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