Victoria Chemicals

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* Yogi’s Minimum
* Case 08-4
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* Background
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* A public utility company, Big Bear Power, has signed a 10-year non-cancelable lease from Goliath Company for a combustion turbine. The lease agreement is signed on December 15, 2004 and Big Bear has the right to use the turbine as of January 1, 2005. * Annual lease payments are $1 million per year, payable ratably over 12 months at the beginning of each month, according to the lease agreement. The minimum rent payment will be $1 million plus an increase equal to the change in the Consumer Price Index from January 1 of the prior year to January 1st of the current year. The rate increase be re-evaluated each year, however, the rate cannot decrease the payment amount. The most recent change in the CPI was 4%. *

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* Research Question
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* Should the costs, or potential costs, associated with the increase in the CPI be included in “minimum lease payments” as defined in ASC 840? *
* Relevant Literature
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* According to ASC 840-10-25-4 and ASC 840-10-55-39 – if lease payments are dependent upon an existing index, such as the CPI, then the payments based on the rate at inception are to be included in minimum lease payments. If there are any index increases or decreases however, the change to the payment is a contingent rental and is an accruable that affects income. The increases or decrease are not to be included in the minimum lease payments. *

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* Conclusion
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* Big Bear Power will not have a payment due in 2005. The minimum lease payment amount will be $1,040,000 [$1,000,000 + (1,000,000 X 4%) = $1,040,000]. After 2005 the $1 million payment will be increased by the annual increase in the CPI from January 1, 2005 through January 1, 2006. If the CPI decreases then the payment will remain at $1 million. As a side note, the increase for the 2006 payment based on the future CPI fluctuation should be calculated on...