Case 08-4 Minimum
Case 08-4
The Bear Minimum
Big Bear Power (Big Bear) is a widely held public utility company that has posted strong financial results for several years. Big Bear has positive cash flow, and it is in compliance with all its debt covenants. Big Bear leases a combustion turbine from Goliath Co. (Goliath) for a 10-year non-cancelable term. The lease agreement is signed on December 15, 2010, and Big Bear’s right to use the turbine begins on January 1, 2011. Various provisions and other facts from the lease are listed below.
Provision 1
Big Bear pays Stipe, Berry, Mills and Buck LLP, its external legal counsel, $500,000 in connection with negotiating the lease agreement. Big Bear is also required to pay $1 million of legal fees incurred by Goliath.
For Provision 1, our group thinks that the external legal counsel $500,000 should be excluded from minimum lease payments, and $1 million of legal fees paid by Big Bear should be included in minimum lease payments.
According to ASC 840-10-25-5, it says “For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following:
a. Contingent rentals
b. Any guarantee by the lessee of the lessor's debt and the lessee's obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance, and taxes in connection with the leased property.”
The nature of the legal counseling fee $500,000 is similar to the executory cost—to make sure the whole process of the lease legally, just like paying taxes or buying insurance to avoid trouble from government and keep things work legally. This legal counseling fee is paid directly to the external legal counsel firm (the third party). The fee has nothing to do with the lessor and it is not an obligatory payment for lessee to be made toward the property leased. Additionally, this legal counseling fee does not match any of the 5
The Bear Minimum
Big Bear Power (Big Bear) is a widely held public utility company that has posted strong financial results for several years. Big Bear has positive cash flow, and it is in compliance with all its debt covenants. Big Bear leases a combustion turbine from Goliath Co. (Goliath) for a 10-year non-cancelable term. The lease agreement is signed on December 15, 2010, and Big Bear’s right to use the turbine begins on January 1, 2011. Various provisions and other facts from the lease are listed below.
Provision 1
Big Bear pays Stipe, Berry, Mills and Buck LLP, its external legal counsel, $500,000 in connection with negotiating the lease agreement. Big Bear is also required to pay $1 million of legal fees incurred by Goliath.
For Provision 1, our group thinks that the external legal counsel $500,000 should be excluded from minimum lease payments, and $1 million of legal fees paid by Big Bear should be included in minimum lease payments.
According to ASC 840-10-25-5, it says “For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following:
a. Contingent rentals
b. Any guarantee by the lessee of the lessor's debt and the lessee's obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance, and taxes in connection with the leased property.”
The nature of the legal counseling fee $500,000 is similar to the executory cost—to make sure the whole process of the lease legally, just like paying taxes or buying insurance to avoid trouble from government and keep things work legally. This legal counseling fee is paid directly to the external legal counsel firm (the third party). The fee has nothing to do with the lessor and it is not an obligatory payment for lessee to be made toward the property leased. Additionally, this legal counseling fee does not match any of the 5