# 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!

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#### 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.

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#### 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.

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