According to FASB 840-10-25-6e: "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 (but shall not be included in the fair value of the leased property) for purposes of applying the 90 percent test in paragraph 840-10-25-1(d)."
Berry, Mills and Buck, the external legal counsel being paid the $500,000 by Big Bear, should be deemed as a special-purpose entity. As defined by SFAS 140 a SPE is used “to carry out a specific purpose, activity, or series of transactions. Such entities have no purpose other than the transactions for which they are created.” Therefore, by the definition of an SPE and FASB 840-10-25-6e, the $500,000 fee should be recorded as part of the minimum lease payment but should not be included in the fair value of the lease property. According to FASB 840-10-25-5, “For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following: a. Contingent rentals
b. Any guarantee by the lessee of the lessor's debt and the lessee's obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance, and taxes in connection with the leased property.”
The $1 million in legal fees incurred by Goliath, paid by Big Bear, is not an executory fee (“an expense such as insurance, maintenance, or tax that a lessee may incur when leasing property or equipment”), or a contingent rental, but an initial direct cost. FASB 13 defines initial direct cost as, “those incremental direct costs incurred by the lessor in negotiating and consummating leasing transactions (e.g. commissions, legal fees).” Thus, conforming to FASB 840-10-25-5, this fee will be included in the minimum lease payments.
As defined by ASC 840-10-25-14, we do not believe the...