FRS 116 Leases (Singapore) illustrative e.g.


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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!
 
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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.
 
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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:

YearPaymentPV
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:

YearPaymentPV
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.
 
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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.

YearPaymentPV
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.
 

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