Proposed ASU Leases - Example
Expected Outcome Approach - Contingent Rents
Assume a retailer enters into a five year lease which, in addition to fixed monthly payments, calls for contingent rents to be paid
at a rate of 1% of annual sales in excess of $1.0 million. Contingent rents are to be paid at the end of each year of the lease.
Based on past performance and future projections, management prepares the following analysis related to estimated forecasted
sales. The retailers incremental borrowing rate is 10% (or 0.83% monthly).
Estimated Present Probability
Estimated Annual Sales Probability Contingent Rent Value Weighted
0% - - -
150,000 117,663
Probability weighted outcome 39,221 50,000
As a result of the foregoing analysis, the retailer would include contingent rent of $39,221 in its estimate of lease payments.
The present value of estimated yearly payments is $7,844 ($39,221/5).
Example of Proposed ED Accounting
Carrying on with the example above, assume that the fixed monthly payments are $5,000. Further assume that the retailer 0.008333333 monthly interest rate
incurred $20,000 in initial direct costs. The present value of the lease payments, including the contingent rent determined $235,326.85 PV of fixed monthly payments
above, is $274,548. The recognized right of use asset at lease inception is $294,548; the lease liability is $274,548. Assume $274,547.99 Total PV - fixed and contingent
actual sales in Year 1 were $2M; contingent rent due is $10,000.
During the first year of the lease, the retailer will record the following:
Amortization of the right of use asset of $58,910 ($294,548/5)
Interest expense on the lease liability of $25,450 (based on a lease amortization schedule using interest method)
Reduction of the lease liability for cash payments of $70,000 ($60,000 + $10,000)
Additional expense of $2,156 would need to also be recorded to "true up" contingent rent ($10,000 - $7,844)
Note that under the Exposure Draft, total expense of $86,516 ($58,910 [amort. of ROU asset] + $25,450 [interest expense] +
$2,156 [contingent rent true-up]) will be recognized. Under current lease accounting standards, the retailer would have
recognized expense of $74,000 ($60,000 [current year fixed rent] + $4,000 ( 1/5 of initial direct costs) + $10,000 [contingent
rent actual payments]). Also, note that the expense under the Exposure Draft would be treated as both amortization and
interest expense; under current GAAP, the entire amount is recognized as lease expense.
Proposed ASU Leases - Example 11/6/2011 9:33 AM Page 2
Compound Period: Monthly
Nominal Annual Rate: 10.000%
CASH FLOW DATA
Event Date Amount Number Period End Date
1 Lease 10/6/2010 274,548.00 1
2 Lease Payment 11/6/2010 5,833.33 59 Monthly 9/6/2015
3 Lease Payment 10/6/2015 5,833.64 1
AMORTIZATION SCHEDULE - Normal Amortization
Date Lease Payment Interest Principal Balance
Lease 10/6/2010 274,548.00
1 11/6/2010 5,833.33 2,287.90 3,545.43 271,002.57
2 12/6/2010 5,833.33 2,258.35 3,574.98 267,427.59
2010 Totals 11,666.66 4,546.25 7,120.41
3 1/6/2011 5,833.33 2,228.56 3,604.77 263,822.82
4 2/6/2011 5,833.33 2,198.52 3,634.81 260,188.01
5 3/6/2011 5,833.33 2,168.23 3,665.10 256,522.91
6 4/6/2011 5,833.33 2,137.69 3,695.64 252,827.27
7 5/6/2011 5,833.33 2,106.89 3,726.44 249,100.83
8 6/6/2011 5,833.33 2,075.84 3,757.49 245,343.34
9 7/6/2011 5,833.33 2,044.53 3,788.80 241,554.54
10 8/6/2011 5,833.33 2,012.95 3,820.38 237,734.16
11 9/6/2011 5,833.33 1,981.12 3,852.21 233,881.95 Yr 1 Interest
12 10/6/2011 5,833.33 1,949.02 3,884.31 229,997.64 25,449.60
13 11/6/2011 5,833.33 1,916.65 3,916.68 226,080.96
14 12/6/2011 5,833.33 1,884.01 3,949.32 222,131.64
2011 Totals 69,999.96 24,704.01 45,295.95
15 1/6/2012 5,833.33 1,851.10 3,982.23 218,149.41
16 2/6/2012 5,833.33 1,817.91 4,015.42 214,133.99
17 3/6/2012 5,833.33 1,784.45 4,048.88 210,085.11
18 4/6/2012 5,833.33 1,750.71 4,082.62 206,002.49
19 5/6/2012 5,833.33 1,716.69 4,116.64 201,885.85
20 6/6/2012 5,833.33 1,682.38 4,150.95 197,734.90
21 7/6/2012 5,833.33 1,647.79 4,185.54 193,549.36
22 8/6/2012 5,833.33 1,612.91 4,220.42 189,328.94
23 9/6/2012 5,833.33 1,577.74 4,255.59 185,073.35
24 10/6/2012 5,833.33 1,542.28 4,291.05 180,782.30
25 11/6/2012 5,833.33 1,506.52 4,326.81 176,455.49
26 12/6/2012 5,833.33 1,470.46 4,362.87 172,092.62 11/6/2011 9:33 AM Page 3
2012 Totals 69,999.96 19,960.94 50,039.02
27 1/6/2013 5,833.33 1,434.11 4,399.22 167,693.40
28 2/6/2013 5,833.33 1,397.45 4,435.88 163,257.52
29 3/6/2013 5,833.33 1,360.48 4,472.85 158,784.67
30 4/6/2013 5,833.33 1,323.21 4,510.12 154,274.55
31 5/6/2013 5,833.33 1,285.62 4,547.71 149,726.84
32 6/6/2013 5,833.33 1,247.72 4,585.61 145,141.23
33 7/6/2013 5,833.33 1,209.51 4,623.82 140,517.41
34 8/6/2013 5,833.33 1,170.98 4,662.35 135,855.06
35 9/6/2013 5,833.33 1,132.13 4,701.20 131,153.86
36 10/6/2013 5,833.33 1,092.95 4,740.38 126,413.48
37 11/6/2013 5,833.33 1,053.45 4,779.88 121,633.60
38 12/6/2013 5,833.33 1,013.61 4,819.72 116,813.88
2013 Totals 69,999.96 14,721.22 55,278.74
39 1/6/2014 5,833.33 973.45 4,859.88 111,954.00
40 2/6/2014 5,833.33 932.95 4,900.38 107,053.62
41 3/6/2014 5,833.33 892.11 4,941.22 102,112.40
42 4/6/2014 5,833.33 850.94 4,982.39 97,130.01
43 5/6/2014 5,833.33 809.42 5,023.91 92,106.10
44 6/6/2014 5,833.33 767.55 5,065.78 87,040.32
45 7/6/2014 5,833.33 725.34 5,107.99 81,932.33
46 8/6/2014 5,833.33 682.77 5,150.56 76,781.77
47 9/6/2014 5,833.33 639.85 5,193.48 71,588.29
48 10/6/2014 5,833.33 596.57 5,236.76 66,351.53
49 11/6/2014 5,833.33 552.93 5,280.40 61,071.13
50 12/6/2014 5,833.33 508.93 5,324.40 55,746.73
2014 Totals 69,999.96 8,932.81 61,067.15
51 1/6/2015 5,833.33 464.56 5,368.77 50,377.96
52 2/6/2015 5,833.33 419.82 5,413.51 44,964.45
53 3/6/2015 5,833.33 374.70 5,458.63 39,505.82
54 4/6/2015 5,833.33 329.22 5,504.11 34,001.71
55 5/6/2015 5,833.33 283.35 5,549.98 28,451.73
56 6/6/2015 5,833.33 237.10 5,596.23 22,855.50
57 7/6/2015 5,833.33 190.46 5,642.87 17,212.63
58 8/6/2015 5,833.33 143.44 5,689.89 11,522.74
59 9/6/2015 5,833.33 96.02 5,737.31 5,785.43
60 10/6/2015 5,833.64 48.21 5,785.43 0.00
2015 Totals 58,333.61 2,586.88 55,746.73
Grand Totals 350,000.11 75,452.11 274,548.00
Lease payments 300,000.00
Assumed contingent rentals 50000
350,000.00