Determining
the present value of the minimum lease payments involves three
important concepts: (1) minimum lease payments, (2) executory costs, and
(3) discount rate.
Minimum Lease Payments. Lessee is obligated to make, or expected to make, minimum lease payments in connection with the leased property. These payments include the following.
1. Minimum Rental Payments—Minimum rental payments are those that lessee must make to lessor under the lease agreement. In some cases, the minimum rental payments may equal the minimum lease payments. However, the minimum lease payments may also include a guaranteed residual value (if any), penalty for failure to renew, or a bargain-purchase option (if any).
2. Guaranteed Residual Value—The residual value is the estimated fair (market) value of the leased property at the end of the lease term. Lessor may transfer the risk of loss to Lessee or to a third party by obtaining a guarantee of the estimated residual value. The guaranteed residual value is either
(1) the certain or determinable amount that Lessee will pay to lessor at the end of the lease to purchase the aircraft at the end of the lease, or
(2) the amount Lessee or the third party guarantees that lessor will realize if the aircraft is returned. (Third-party guarantors are, in essence, insurers who for a fee assume the risk of deficiencies in leased asset residual value.) If not guaranteed in full, the unguaranteed residual value is the estimated residual value exclusive of any portion guaranteed.
3. Penalty for Failure to Renew or Extend the Lease—The amount Lessee must pay if the agreement specifies that it must extend or renew the lease, and it fails to do so.
4. Bargain-Purchase Option—An option given to Lessee to purchase the aircraft at the end of the lease term at a price that is fixed sufficiently below the expected fair value, so that, at the inception of the lease, purchase is reasonably assured.