The Bear Minimum Case Study

947 Words May 19th, 2013 4 Pages
Provision 1:
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
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Looking at 840-10-25-4 clarifies that we should base our minimum lease payment on the CPI at the time of inception of the lease (which is 4%).

According to "Minimum Lease Criterion" 840-10-25-4: "This guidance addresses what constitutes minimum-lease-payments under the minimum-lease-payments criterion in paragraph 840-10-25-1(d) from the perspective of the lessee and the lessor. Lease payments that depend on a factor directly related to the future use of the leased property, such as machine hours of use or sales volume during the lease term, are contingent rentals and, accordingly, are excluded from minimum lease payments in their entirety. (Example 6 [see paragraph 840-10-55-38] illustrates this guidance.) However, lease payments that depend on an existing index or rate, such as the consumer price index or the prime interest rate, shall be included in minimum lease payments based on the index or rate existing at lease inception; any increases or decreases in lease payments that result from subsequent changes in the index or rate are contingent rentals and thus affect the determination of income as accruable."

Whether or not the CPI increases over time our minimum lease payments will continue to be the same, based on the CPI at the inception of the lease. FASB 840-10-25-5 clarifies that the contingent rentals should not be included in the minimum lease payment, but should be used to calculate the payments
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