Question

Distinguish between rental payments and minimum lease payments. Indicate what is included in minimum lease payments.

Answer 1

minimum lease payment -

It is the lowest amount that a lessee can expect to make over the lifetime of the lease. Minimum lease payments are payments required or expected to be made by the lessee. Minimum Lease payment include minimum rental payment less executory cost , guaranteed residual value , bargain purchase option , and penalty for failure to renew the lease.

International Accounting Standard 17 (IAS 17) defines minimum lease payments as “the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:

(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or

(b) for a lessor, any residual value guaranteed to the lessor by:

(i) the lessee;

(ii) a party related to the lessee; or

(iii) a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee”.

Minimum Rental Payment -

Minimum rental payments are the periodic payments made by the lessee and received by the lessor. These payments may include executory costs such as maintenance, taxes, and insurance. It Permit the Lease/Purchase Documents not to provide at all times for rental and other payments from the Company under the Lease/Purchase Documents in amounts sufficient to cover all of the Obligations and all of its operating and other expenses, in each case on or prior to the dates when such Obligations and expenses become due and payable.