October 9th, 2014
To: Big Bear Power
Date: October 7, 2014
Re: The Bear Minimum
Summary
Big Bear Power, a public utility company, has entered into a 10-year non-cancelable agreement with Goliath Company to lease a turbine. The lease is effective on January 1, 2011. The purpose of this report is to provide Big Bear with insight in evaluating whether the costs or potential costs associated with the lease should be included in the “minimum lease payments” according to US GAAP Accounting Standards Codification. When assessing the minimum lease payments, we reviewed the legal costs incurred to Big Bear’s external legal counsel (Stripe, Berry, Mills, and Buck LLP) pertaining to the negotiation of the lease terms. We also examined the provision requiring Big Bear to pay a penalty if it were to default under its current credit arrangement with its bank, as well as the effect on monthly payments that are subject to an increase in the consumer price index calculation.
Provision One
First we will review the costs incurred during the negotiating of the lease terms. Big Bear is required to pay its external legal counsel $500,000 in legal costs. This amount should not be included in its minimum monthly payments because per accounting guidance ASC 840-10-25-5:
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.
Therefore, any amount incurred by Big Bear during the negotiation
