FRS 116 Leases (Singapore) illustrative e.g.

[argh]

THE QUESTION:

Entity A enters into a 10 year lease for a building floor for $50,000 per year. First instalment was made at commencement date.

There was an extension option for 5 years for $55,000 per year. At the inception of the lease, there was no reasonable certainty that the option will be exercised.

Initial direct costs were incurred of $20,000 , comprising:
(a) Payment to former tenant occupying the floor of $15,000.
(b) Commission was paid to real estate agent who arranged the lease of $5,000.

As an incentive, the lessor reimburses the entity $5,000 in cash and leasehold improvements of $7,000.

Implicit interest rate is not readily determinable. The incremental borrowing rate is 5% per annum.

THE ANSWER:

Present value of the lease liability is $405,391.


MY DIFFICULTY:
I don't know how to get $405,391.

My workings:
Lease liability is the PV of outstanding lease payments, including in-substance fixed payments less any incentive receivables.
So I calculated: $(10 x 50,000 - 5,000 - 7,000) = $488,000
Used discount rate of 5%.
PV of $488,000 = 488,000 / (1 + 0.05)^10 = 299,589.67
Added initial direct costs $20,000 = $319,589.67


Hope someone can guide me on how to get $405,391. Thank you very much!

 

[Praz Finpoint]

That's cause your calculations of the Present Value isn't correct. You have to take each annual lease payment of $50,000 in each year and divide by (1 + 5%)^n and n here is the year the Payment occurred. For example, in Year 6, payment of $50,000 is $50,000 / 1.05^6, and you do this every year accordingly.

 

[argh]

Thanks very much! This was from an ISCA e-learning course and there wasn't a solution provided for calculating the PV.

I'm still not getting it though:

Year	Payment	PV
1​	50000​	47,619.05
2​	50000​	45,351.47
3​	50000​	43,191.88
4​	50000​	41,135.12
5​	50000​	39,176.31
6​	50000​	37,310.77
7​	50000​	35,534.07
8​	50000​	33,841.97
9​	50000​	32,230.45
10​	50000​	30,695.66
		386,086.75
		405391​
		- 19,304.25

There's a $19.3k difference.

Or if I add the initial direct costs of $20,000:

Year	Payment	PV
1​	70000​	66,666.67
2​	50000​	45,351.47
3​	50000​	43,191.88
4​	50000​	41,135.12
5​	50000​	39,176.31
6​	50000​	37,310.77
7​	50000​	35,534.07
8​	50000​	33,841.97
9​	50000​	32,230.45
10​	50000​	30,695.66
		405,134.37
		405391​
		- 256.63

Then the difference is only $257, but I haven't done anything about the $(5,000 + 7,000) = $12k incentive yet.

 

[argh]

Ahhh I got it.
" First instalment was made at commencement date. " Shouldn't do anything about the 1st year payment. Then the 2nd year payment is made at the beginning of year 2, which equals end of year 1, so n is 1. I.e. 50,000/1.05^1 for the 2nd year payment, and so on.

Year	Payment	PV
1​	50000​	50,000.00
2​	50000​	47,619.05
3​	50000​	45,351.47
4​	50000​	43,191.88
5​	50000​	41,135.12
6​	50000​	39,176.31
7​	50000​	37,310.77
8​	50000​	35,534.07
9​	50000​	33,841.97
10​	50000​	32,230.45
		405,391.08

I see that the $20k initial direct costs were debited to ROU asset without discounting (Cr. Cash), and $5k was credited to ROU asset for the lease incentive (Dr. Cash), so they are not included in the PV calculation.

 

[lynn88]

Hi, i have a query with regards to lease accounting and wish to seek advice if possible.
If lease payment consists of a finance cost and a dr to lease liability) but come end of year 1, in keeping the set of books, the lease liability reduction gets posted to Current lease liab, but then what about non-current lease liab. Shouldn't a reclass be made in beginning of year2 to shift the NCL to CL? will that be a journal entry posting of DR NCL, CR CL? Please do correct me if my understanding is wrong. Thanks.