Question - Singapore Jet Ltd (SJL) was incorporated in 2010 in Singapore. Its vision is to eventually compete with the likes of Singapore Airlines, Malaysia Airlines and Thai Airways in South East Asia. The company currently leases two aircraft the details of which are as follows:
1. The first aircraft, an executive jet, was leased on 1 July 2010 when it had a fair value of $240 million. The terms of the lease were as follows:
Lease term 5 years
Annual lease payments (in advance) $17.5 million
Initial non-refundable lease deposit $5 million
SJL is required to pay the lessor and agreed mount for any miles flown by the jet in excess of $300,000 per year.
2. The second aircraft a boeing 747 was leased on 1 July 2011 when it had a fair value of $505 million, with lease tems as follows:
Initial lease term 15 years annual lease payments over 15 years (in arrears) $45million annual lease payments during extension period of 20 years $100 Implicit interest rate 4%
Present value of minimum lease payments $500 million
Useful life of 747 38 years
Required
a) Prepare a presentation for the Board of SJL which:
i) explains the accounting treatment applied to each aircraft and the reasons for it
ii) identifies amounts to be recognised in the financial statements in the year ended 30 June 2013 (to the nearest $'000)
b) If the lessor had offered SJL an incentive payment of $2 million, rather than requiring an initial lease deposit, how would the accounting differ?
c) Produce the operating lease disclosure note for SJL and explain why disclosure of future minimum lease payments is so important.