Issue: Identify the proper date of lease inception for multiple “takedowns” subject to a Master Lease Agreement.
FAS 13 ¶ 5(b) (as modified by FAS23).
Inception of the lease. With the exception noted below, the date of the lease agreement or commitment, if earlier. For purposes of this definition, a commitment shall be in writing, signed by the parties in interest to the transaction, and shall specifically set forth the principal terms of the transaction. However, if the property covered by the lease has yet to be constructed or has not been acquired by the lessor at the date of the lease agreement or commitment, the inception of the lease shall be the date that construction of the property is completed or the property is acquired by the lessor.
FAS 23. Amendments to FASB Statement No. 13
FAS23, Par. 6:
FAS23, Par. 7
FAS23, Par. 8
FAS 23. Appendix A: SUMMARY OF CONSIDERATION OF COMMENTS ON EXPOSURE DRAFT
14. Some respondents questioned the application of the amended definition of inception of the lease to multiple “takedowns” of equipment under a master lease agreement. If a master lease agreement specifies that the lessee must take a minimum number of units or dollar value of equipment and if all other principal provisions are stated, the inception of the lease is the date of the master lease agreement with respect to the specified minimum. The inception of the lease for equipment “takedowns” in excess of the specified minimum is the date that the lessee orders the equipment because the lessee does not agree to lease the equipment until that date. To the extent that lease payments for required “takedowns” are based on value at the date of the “takedown,” the lease, in effect, has a pre-acquisition period escalator provision based on value. Paragraphs 8-10 of this Statement address that situation. If a master lease agreement does not require the lessee to “takedown” any minimum quantity or dollar value of equipment, the agreement is merely an offer by the lessor to rent equipment at an agreed price and the inception of the lease is the date that the lessee orders the equipment.
The determination of the inception of the lease is as follows:
“If the lease agreement or commitment, if earlier, includes a provision to escalate minimum lease payments for increases in construction or acquisition cost of the leased property or for increases in some other measure of cost or value, such as general price levels, during the construction or pre-acquisition period, the effect of any increases that have occurred shall be considered in the determination of “fair value of the leased property at the inception of the lease”
**Note: There may be some confusion in the reading of paragraph 5(b) of FAS13 in that it states:
“However, if the property covered by the lease has yet to be constructed or has not been acquired by the lessor at the date of the lease agreement or commitment, the inception of the lease shall be the date that construction of the property is completed or the property is acquired by the lessor.”
Paragraph 8(b) of FAS13 is modified by FAS23 and has to do with the lessor’s treatment of a transaction which on many occasions is the opposite of the treatment required of the lessee. Paragraph 6 of FAS13 clearly states that subparagraph (a) is applicable exclusively to lessees and subparagraph (b) is applicable exclusively to lessors. Subparagraph 6(a) refers only to paragraph 7 of FAS13 for determination for the lessee treatment of operating or capital lease. Subparagraph 6(b) refers to paragraph 8 which has been modified by FAS23. Section 7 of FAS23 modifies paragraph 8(b) which both 8(a) and 8(b) must be met along with one of the criteria for paragraph 7 of FAS13 in order for the lease to be treated as a capital, sales type lease for the lessor. This treatment is further reinforced by FAS23 Appendix A, #14.