The Bear Minimum

Per your request, our root word conducted research to train whether make up or potential costs of the readinesss of huge book indication numbers carry of ogre Cos burn turbine should be take on in its minimal commit breakments. We have provided a unofficial of the facts, our closing curtain, the basis for our conclusion, and an analytic thinking of possible alternatives to our conclusion as requested. unofficial of the Facts large-mouthed turn out male monarch (the Comp any), a public utility(prenominal) attach to, is leasing a combustion turbine from Goliath Co. for a 10-year, non- arsecelable term.The ask pact was signed on December 15, 2004, and the companys responsibility to use the turbine starts on January 1, 2005. boastfully relent designer has been monetaryly slopped for a number of years, has ordained cash flow, and is in conformation with in on the whole of its debt covenants. The take away correspondence contains three cookings, i ndividu ally of which has associated costs that whitethorn potentially deficiency to be imply in the computing of stripped-down acquire requitals. The issue at hand is find whether the costs in these plannings should, in fact, be complicate in token(prenominal) affiance payments certainty preparation 1 humongous afford baron should non include the $500,000 dialog fee in its marginal make payments because, by comment, it is not an obligatory payment to be do toward the asset. On the opposite hand, the Company should include the $1 jillion jural fee in tokenish absorb payments since it is considered an initial demand cost made in connection with the chthonictake property. preparation 2 The countenance concord includes a provision requiring a punishment payment if thumping turn offs bank decl bes it in thoughtlessness low its primary commendation arrangement.This potential cost should be include in collusive lower limit necessitate payments since a overlook of pre containd criteria lasts to realize thoughtlessness. Provision 3 The take on pledge stipulates king-size stand ups yearbook engage come to be intensify magnitude by the persona increment in the Consumer Price superpower (CPI). Because the plight payments guess on the index, it moldiness(prenominal) be include in the unhurriedness of the negligible countenance payment at the stemma of the subscribe savvy. Basis for demonstration Provision 1In the pecuniary write up Standards posters (FASB) history Standards codification (ASC) 840-10-25-5, negligible call for payments argon the payments that the lessee is compel to advert or can be ask to make in connection with the downstairstake property, excluding contingent rentals, any guarantees of the lessors debt, and executory costs. Although negotiating fees incurred by queen-size ante up spring be not executory costs, the fees toward its outer legitimate instruction are considere d non-obligatory in nature and should be get downd. In contrast, legal fees paid by voluminous deport Power on behalf of Goliath Co. an be categorized as initial unmediated costs under Statement of fiscal chronicle Standards (SFAS) 91. organism defined as such, they can be include in the general explanation of payments they are obligated to make in connection with the engage compact. Provision 2 Big impart Power is issuing to neglectfulness if in that respect is a textile unseemly deviate in its fiscal particularize. FASB ASC 840-10-25-14 provides guidance for default covenants relating to nonperformance and provides quadruplet conditions as succeeds a. The default covenant provision is customary in leasing arrangements. b.The occurrence of the proceeds of default is objective lensly determinable. c. Predefined criteria, related s think of to the lessee and its operations, has been established for the mark of the event of default. d. It is probable to assume, based on the facts and circumstances that exist at lease spring, that the event of default allow not occur. In applying this condition, it is anticipate that entities would consider new trends in the lessees operations. The Codification states that if the lease system fails to meet all of these conditions, Big tire Power must include the punishment in its stripped-down lease payments.As already utter in the cultivation provided, condition (a) is met. Upon advance analysis, condition (b) and (d) are also metBig Bears bank is an objective third-party that will larn an occurrence of default, and Big Bear Power is financially strong with remote likeliness of default. While the facts imply that real(a) adverse transform is a predefined meter to determine default, it is our contention that the wishing of comment in the documents is sufficient usher to not sate the third condition.Furthermore, the absence of a definition implies a escape of objectivity inwardly the c riteria the phrase substantive adverse miscellanea provides no falsifiable benchmark to which Big Bear Power can be examined through its operations, as mandated by the condition. Consequently, Big Bear Power should add the utmost meat of the penalty to the minimum lease payments. Provision 3 According to FASB ASC 840-10-25-4, the caboodle of lease payments that depends on an index, such as the Consumer Price Index(CPI), should be included in calculating minimum lease payments at lease inception.Big Bears lease payments are contingent on outgrowths in the CPI, because it must follow this rule. The lease agreement states that Big Bear will pay $1 one thousand thousand per year, and the lease amount will change at each year-end by the increase in the index rate. wholly the most youthful CPI increase at inception will be included in minimum lease payments. Future increases in the index will not be included as they are considered a contingent rental. synopsis of alternating( a)s Provision 1 choice A debate of Provision 1 suggests that Big Bear Power should not include the $1 one million million million in legal fees toward minimum lease payments.Initial direct costs whitethorn be considered minutes separate from the lease itself with benefits being cognize at the eon of exchange ( supranational Accounting Standards Board IASB, 2009). Their realization as assets would be erroneous under this premise, and instead would require an immediate expense to the income statement. Still, it remains our aggroups testimony that the $1 million legal fees be treated as described, in accordance with the FASBs logic behind fees closely-tied to a lease agreement. Provision 2 AlternativeIt can be contended that the required penalty payment under a contract bridge of default should not be included in the minimum lease payments. As stated, FASB ASC 840-10-25-14 provides four conditions, which, if all fulfilled, would not include the penalty in minimum lease payme nts. Based on those facts provided, and regardless of the definition behind material adverse change, it is arguable that a sufficient criterion exists to determine default. Furthermore, the criterion is established by a third-party with no relation to Goliath Company.This would fulfill condition (c). Provision 3 Alternative Alternative treatment of this provision would adjust minimum lease payments yearly after 2005 for the yearbook increase in the Consumer Price Index. For example, if the lease payment in 2005 is $1 million and the most new-fashioned CPI increases by 4%, the lease payment would increase to $1,040,000 in 2006, and $1,081,600 in 2007. The reasoning for this get down is to more accurately measure the lease agreement for financial reporting.However, this method is not in agreement with FASB ASC 840-10-25-4, which states a lease dependent on an index should solely include the index existing at lease inception when calculating minimum lease payments. References fisca l Accounting Standards Board. (n. d. ). Accounting standards codification. Norwalk, CT pecuniary Accounting Standards Board. Retrieved February 8, 2010. international Accounting Standards Board. (2009). IASB staff paper leases initial direct costs. London, join Kingdom International Accounting Standards Board. Retrieved February 8, 2010.The Bear MinimumPer your request, our group conducted research to determine whether costs or potential costs of the provisions of Big Bear Powers lease of Goliath Cos combustion turbine should be included in its minimum lease payments. We have provided a summary of the facts, our conclusion, the basis for our conclusion, and an analysis of possible alternatives to our conclusion as requested. Summary of the Facts Big Bear Power (the Company), a public utility company, is leasing a combustion turbine from Goliath Co. for a 10-year, non-cancelable term.The lease agreement was signed on December 15, 2004, and the companys right to use the turbine s tarts on January 1, 2005. Big Bear Power has been financially strong for a number of years, has positive cash flow, and is in accordance with all of its debt covenants. The lease agreement contains three provisions, each of which has associated costs that may potentially need to be included in the calculation of minimum lease payments. The issue at hand is determining whether the costs in these provisions should, in fact, be included in minimum lease paymentsConclusion Provision 1 Big Bear Power should not include the $500,000 negotiation fee in its minimum lease payments because, by definition, it is not an obligatory payment to be made toward the asset. On the other hand, the Company should include the $1 million legal fee in minimum lease payments since it is considered an initial direct cost made in connection with the leased property. Provision 2 The lease agreement includes a provision requiring a penalty payment if Big Bears bank declares it in default under its primary credi t arrangement.This potential cost should be included in calculating minimum lease payments since a lack of predetermined criteria exists to determine default. Provision 3 The lease agreement stipulates Big Bears annual lease amount to be increased by the percentage increase in the Consumer Price Index (CPI). Because the lease payments depend on the index, it must be included in the calculation of the minimum lease payment at the inception of the lease agreement. Basis for Conclusion Provision 1In the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) 840-10-25-5, minimum lease payments are the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding contingent rentals, any guarantees of the lessors debt, and executory costs. Although negotiating fees incurred by Big Bear Power are not executory costs, the fees toward its external legal counsel are considered non-obligatory in nature a nd should be expensed. In contrast, legal fees paid by Big Bear Power on behalf of Goliath Co. an be categorized as initial direct costs under Statement of Financial Accounting Standards (SFAS) 91. Being defined as such, they can be included in the general description of payments they are obligated to make in connection with the lease agreement. Provision 2 Big Bear Power is subject to default if there is a material adverse change in its financial condition. FASB ASC 840-10-25-14 provides guidance for default covenants relating to nonperformance and provides four conditions as follows a. The default covenant provision is customary in leasing arrangements. b.The occurrence of the event of default is objectively determinable. c. Predefined criteria, related solely to the lessee and its operations, has been established for the determination of the event of default. d. It is reasonable to assume, based on the facts and circumstances that exist at lease inception, that the event of defau lt will not occur. In applying this condition, it is expected that entities would consider recent trends in the lessees operations. The Codification states that if the lease agreement fails to meet all of these conditions, Big Bear Power must include the penalty in its minimum lease payments.As already stated in the information provided, condition (a) is met. Upon further analysis, condition (b) and (d) are also metBig Bears bank is an objective third-party that will determine an occurrence of default, and Big Bear Power is financially strong with remote likelihood of default. While the facts imply that material adverse change is a predefined criterion to determine default, it is our contention that the lack of definition in the documents is sufficient evidence to not fulfill the third condition.Furthermore, the absence of a definition implies a lack of objectivity within the criteria the phrase material adverse change provides no verifiable benchmark to which Big Bear Power can be examined through its operations, as mandated by the condition. Consequently, Big Bear Power should add the maximum amount of the penalty to the minimum lease payments. Provision 3 According to FASB ASC 840-10-25-4, the portion of lease payments that depends on an index, such as the Consumer Price Index(CPI), should be included in calculating minimum lease payments at lease inception.Big Bears lease payments are contingent on increases in the CPI, therefore it must follow this rule. The lease agreement states that Big Bear will pay $1 million per year, and the lease amount will change at each year-end by the increase in the index rate. Only the most recent CPI increase at inception will be included in minimum lease payments. Future increases in the index will not be included as they are considered a contingent rental. Analysis of Alternatives Provision 1 Alternative A debate of Provision 1 suggests that Big Bear Power should not include the $1 million in legal fees toward minimum lea se payments.Initial direct costs may be considered transactions separate from the lease itself with benefits being realized at the time of exchange (International Accounting Standards Board IASB, 2009). Their recognition as assets would be erroneous under this premise, and instead would require an immediate expense to the income statement. Still, it remains our teams recommendation that the $1 million legal fees be treated as described, in accordance with the FASBs logic behind fees closely-tied to a lease agreement. Provision 2 AlternativeIt can be contended that the required penalty payment under a declaration of default should not be included in the minimum lease payments. As stated, FASB ASC 840-10-25-14 provides four conditions, which, if all fulfilled, would not include the penalty in minimum lease payments. Based on those facts provided, and regardless of the definition behind material adverse change, it is arguable that a sufficient criterion exists to determine default. Fur thermore, the criterion is established by a third-party with no relation to Goliath Company.This would fulfill condition (c). Provision 3 Alternative Alternative treatment of this provision would adjust minimum lease payments annually after 2005 for the annual increase in the Consumer Price Index. For example, if the lease payment in 2005 is $1 million and the most recent CPI increases by 4%, the lease payment would increase to $1,040,000 in 2006, and $1,081,600 in 2007. The reasoning for this approach is to more accurately measure the lease agreement for financial reporting.However, this method is not in agreement with FASB ASC 840-10-25-4, which states a lease dependent on an index should only include the index existing at lease inception when calculating minimum lease payments. References Financial Accounting Standards Board. (n. d. ). Accounting standards codification. Norwalk, CT Financial Accounting Standards Board. Retrieved February 8, 2010. International Accounting Standard s Board. (2009). IASB staff paper leases initial direct costs. London, United Kingdom International Accounting Standards Board. Retrieved February 8, 2010.