Accounting

As per the lease agreement with Goliath Co. signed on December 15, 2004, the Big Bear Company in compliance with the definition of rental provided in section 13 of the Financial Accounting Standards Board (FSAB) hereby recognized that this type of lease fall under the category of minimum lease payments. Less payment under this category depend on existing factors on which payments are made and are measurable at the time of inception (Statement of Financial Accounting Standards No. 29, p. 4).

Given the information above, the provisions that are factors to this agreement have been carefully analyzed and found out that of the three provisions it appears that only two should be included in the minimum lease payments. These are provision 2 and provision 3 in view of the FASB ruling that minimum lease payment should only include actual monthly rentals plus the executory costs excluding repair expense, insurance fees, and the required tax expense.

Facts
December 15, 2004, Big Bear signed a lease agreement with Goliath Co for a ten year non- On cancelable term to lease a combustion turbine for one million dollars payable ratably over 12 months. Under provisions 1, Big Bear paid five hundred thousand dollars to its legal council that handled the negotiation and agreed to pay the legal fees incurred by the Goliath Co in the amount of one million dollars aside from the annual lease payments in the amount of million dollars payable over twelve moths as stated in provisions three. Big Bear also recognized that in the event that Big Bears bank declares default under its primary credit arrangement, Big Bear will be required  to pay penalty particularly if there a material adverse change in its financial condition.  

Research (Discussions)
Ryan (2007) defined minimum lease payments as the payments the lessee is required to make over the lease term in connection with the leased property (Ryan, p. 359). Minimum payment according to him include guarantees by the lessee of the residual value of the leased asset and penalties the lessee is required to make at the end of the lease term if the lease payments is not renewed (p. 359). Ryan emphasized that minimum payment do not include contingent rentals, guaranteed by the lessee of the lessors debt, or executory costs such as those mentioned earlier.  The FASBs FAS 13 status also confirms that the lessee can only be required to pay    

Ryan, S. (2007) Financial Instruments and Institution Accounting and Disclosure USA John Wiley and Sons
httpwww.xavierpaper.comdocumentsusgaapn.Fas29.pdf On December 15, 2004, Big Bear signed an agreement with Goliath Co for a ten year non-cancelable term to lease a combustion turbine for one million dollars payable ratably over 12 months. Under provision 1, Big Bear paid five hundred thousand dollars to its legal council who negotiated the deal and agreed to pay the legal fees incurred by Goliath Co amounting to one million dollars, aside from the annual lease payments in the same amount stated in provision three. Big Bear also recognized that in the event that Big Bears bank declares default under its primary credit arrangement, Big Bear will be required  to pay penalty particularly if there is a material adverse change in its financial condition.    

Research (Discussions) -
Ryan (2007) defined minimum lease payments as the payments the lessee is required to make over the lease term in connection with the leased property (p. 359). Minimum payment according to him include guarantees by the lessee of the residual value of the leased asset and penalties the lessee is required to make at the end of the lease term if the lease payments is not renewed (p. 359). Ryan emphasized that minimum payment does not include contingent rentals, guaranteed by the lessee of the lessors debt, or executory costs such as those mentioned earlier.  The FASBs FAS 13 status also confirms that the lessee can only be required to pay in connection with leased property.    

Provision 1 revealed that Big Bear made other payment aside from the usual rental payment which clearly do not include in the minimum lease payment. This makes it clear that the costs as well as the potential cost associated to the provision could not be included in the minimum lease payment as defined by Ryan and as stated in the FASBs FAS 13 because these payments are not required in connection with the lease term. The payments mentioned in provisions 2 and 3 however, can be included in the minimum lease payments because they were obviously required in the lease agreement.

Provision 2 for instance stated that in case of a default provision in the lease, Big Bear will be required to pay penalty payment. According to FASB Emerging Issues Task Force, penalty payment is part of the bargain renewal options to which failure on the part of the lessee to abide in the lease terms at the inception of a lease will incur penalty on the part of the lessee (FASB Emerging Issues Task Force, p. 2). Provision 2 therefore should be included in the minimum lease payment in view of the fact that penalty payments are part of the lease terms agreement and is therefore required in making the lease terms.

Provision 3 on the other hand, talks about the required rental or lease payment in the amount of one million dollars payable ratably over twelve months for the next ten years. The payments mentioned in this provision including the interest rate are required in making the lease terms. But the main ground for the inclusion of these two provisions in the minimum lease payment is the fact the factor by which the lease payment depends exists and is measurable at the time of inception of the lease. Apparently, factors to which lease payment depend do not exist in provision one and therefore should not be included in the minimum lease payment.

Conclusion
Given the circumstance behind lease payments, it is important that a lessee settle on the lease term at the inception of a lease. In this way, technical problems arising from lack of concrete knowledge of the terms and agreement stipulated in the lease contract can be avoided. It is therefore important to determine the exact contents of the agreement including the duration, the residual value and every provision in the lease agreement not only to avoid technical problems but also to reduce expenses by negotiating with the lessor potential options. Fishman (2008) aptly stated that determining how long a lease lasts will determine whether you can currently deduct expense or have to deduct it over the entire leased terms (p. 187). Furthermore, in case the lessee opted to buy the property at the end of the lease contract, determining the residual value of the property beforehand, can help the lessee decide whether to buy the leased property or to purchase brand new.