Page 93 - pwc-lease-accounting-guide_Neat
P. 93
Lease classification
□ Each day the equipment is available for use and operated by Lessor Corp, Lessee Corp must pay
$1,000;
□ Each day the equipment is available for use and Lessor Corp is available to operate the equipment,
but the asset is not utilized as instructed by Lessee Corp, Lessee Corp must pay $750;
□ Each day the equipment is (a) unavailable for use at the request of Lessor Corp (e.g., maintenance,
required inspections), (b) unavailable for use due to events outside of both Lessee Corp and Lessor
Corp’s control (e.g., weather conditions), or (c) available for use, but Lessor Corp is not available
to operate the equipment, Lessee Corp must pay $500. If the aggregate days the equipment is not
operational due to (a), (b), or (c) exceeds 15 in a year, no payment is due from Lessee Corp for
non-operational days exceeding the 15 day maximum. Based on historical experience with similar
contracts, it is probable the total number of nonoperational days will exceed the 15 day maximum.
What are the lease payments for purposes of classifying the lease?
Analysis
Daily fixed payments are $750.
The daily rate of $750 represents the lowest amount the lessee would pay the lessor when the
underlying asset is available for use. The additional $250 the lessee would pay when it uses the asset is
a variable payment based on usage, and, therefore, is excluded from lease payments. The $500
payment level (and $0 payment) only apply when the lessor is unable to make the asset available for
the lessees use, i.e., they result from a protective right. Payments (or payment reductions) resulting
from a protective right are not considered in determining lease payments. Thus, any reductions in rent
below $750 are (negative) variable payments. Variable payments are excluded from lease payments
even though Lessee Corp and Lessor Corp concluded it is probable that the total number of
nonoperational days will exceed the 15 day maximum, resulting in days when Lessee Corp is not
required to make payments to Lessor Corp.
The daily rate of $750 represents the lowest contractual rate that is not the result of a protective right
(i.e., it is the in substance daily fixed payment). Accordingly, the total annual consideration in the
contract is $273,750 ($750 per day × 365 days), which should be allocated between the lease and
nonlease components. Only the payments allocated to the lease should be considered for purposes of
classifying the lease.
3.3.4.4 Residual value guarantees
The ASC 842 Glossary provides the following definition of a residual value guarantee.
Definition from ASC 842 Glossary
Residual Value Guarantee: A guarantee made to a lessor that the value of an underlying asset returned
to the lessor at the end of a lease will be at least a specified amount.
A residual value guarantee provides a lessor with certainty (subject to credit risk) that the fair value of
the underlying asset subject to lease will not decline below a certain amount. Lessees may be
motivated to provide such guarantees in order to obtain a lease that may not otherwise be available to
3-27
