Capital Lease?

[fishwithwings]

Anyone know why is the capital lease categorized as an asset?

[porcupine]

Capital leases, unlike operating leases, are put on the balance sheet. That asset should have an offsetting liability. What company is this?

[Guest Cameron]

Capital leases, unlike operating leases, are put on the balance sheet. That asset should have an offsetting liability. What company is this?

 

Looks like Avalon Holdings Corp

[fishwithwings]

Capital leases, unlike operating leases, are put on the balance sheet. That asset should have an offsetting liability. What company is this?

Not much in the way of an offsetting liability.

[Cigarbutt]

Not much info but will give it a try.

Given that you have signed a contract for some kind of commercial lease, significant changes after may trigger a re-assessment of the deal terms and reporting.

 

So, unplanned significant leasehold improvements that occur during the lease contract may require to record the "investment" as an asset to be amortized over the economic life of the of the asset or until the end of the lease.

 

Let's say you rent a relatively large office under a typical commercial long term loan resulting in an operating lease and, after a while, you make a significant investment to upgrade and have a Starbucks-like café integrated to the office. My understanding is that the lease may "become" a capital lease and the new capital investment that you "own" (leasehold improvements) is capitalized, recorded as an asset and amortized.

 

Makes sense?

 

 

[fishwithwings]

Not much info but will give it a try.

Given that you have signed a contract for some kind of commercial lease, significant changes after may trigger a re-assessment of the deal terms and reporting.

 

So, unplanned significant leasehold improvements that occur during the lease contract may require to record the "investment" as an asset to be amortized over the economic life of the of the asset or until the end of the lease.

 

Let's say you rent a relatively large office under a typical commercial long term loan resulting in an operating lease and, after a while, you make a significant investment to upgrade and have a Starbucks-like café integrated to the office. My understanding is that the lease may "become" a capital lease and the new capital investment that you "own" (leasehold improvements) is capitalized, recorded as an asset and amortized.

 

Makes sense?

 

Yes!  This is great, IDK, why I didn't, think of this.  The reports even state that "the company is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by the company for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations."

 

Any idea as to what happens to the balance sheet/income statement at the end of the lease when the company returns the property back to the lessor?

 

[Cigarbutt]

Each contract is different and if the lessee has to return the "property" to the lessor, you'd have to look at the specific terms of the contract (disclosed?).

I would guess though that both lessee and lessor have a long term mindset and either the term of the lease is very long or renewal is quasi-automatic (for personal or contractual reasons).

Who would significantly invest in leased premises if you have no guarantees about what happens at renewal?

[fishwithwings]

Each contract is different and if the lessee has to return the "property" to the lessor, you'd have to look at the specific terms of the contract (disclosed?).

I would guess though that both lessee and lessor have a long term mindset and either the term of the lease is very long or renewal is quasi-automatic (for personal or contractual reasons).

Who would significantly invest in leased premises if you have no guarantees about what happens at renewal?

 

By the looks of it, the company seems to be investing cash into the property in lieu of making substantial rental payments.  There is no mention of the lease besides this section.  I'm guessing if they decide not to renew, the capital lease would be written off?

[John Hjorth]

...Any idea as to what happens to the balance sheet/income statement at the end of the lease when the company returns the property back to the lessor?

 

The balance sheet gets a "reset" to zero, everything "left" [so far] goes into the income statement. It's IFRS accounting.

[fishwithwings]

...Any idea as to what happens to the balance sheet/income statement at the end of the lease when the company returns the property back to the lessor?

 

The balance sheet gets a "reset" to zero, everything "left" [so far] goes into the income statement. It's IFRS accounting.

 

So something along the lines of an extraordinary loss for that year?

 

Thanks again!

[rb]

...Any idea as to what happens to the balance sheet/income statement at the end of the lease when the company returns the property back to the lessor?

 

The balance sheet gets a "reset" to zero, everything "left" [so far] goes into the income statement. It's IFRS accounting.

 

So something along the lines of an extraordinary loss for that year?

 

Thanks again!

There should be any extraordinary loss if this is indeed a leasehold improvement. As far as I remember the accounting rules the depreciation should be based on the economic life of the improvement or the term of the lease - whichever is shorter. So at the end of the lease the asset should be zero because it's all been depreciated away. You may want to doublecheck that though. Look at note 1 or note 2 of the FS.

[Guest Cameron]

...Any idea as to what happens to the balance sheet/income statement at the end of the lease when the company returns the property back to the lessor?

 

The balance sheet gets a "reset" to zero, everything "left" [so far] goes into the income statement. It's IFRS accounting.

 

So something along the lines of an extraordinary loss for that year?

 

Thanks again!

There should be any extraordinary loss if this is indeed a leasehold improvement. As far as I remember the accounting rules the depreciation should be based on the economic life of the improvement or the term of the lease - whichever is shorter. So at the end of the lease the asset should be zero because it's all been depreciated away. You may want to doublecheck that though. Look at note 1 or note 2 of the FS.

 

That's right the leasehold would be amortized over the life of the lease

[fishwithwings]

Very helpful.  Thanks, everyone!

[Cigarbutt]

Thinleyw,

 

Looked at this (partly identified firm...) in more details.

 

The "lease" arrangement is relatively unusual.

 

The initial 10 yr lease was initiated in 2003 and was deemed to be modified shortly after in connection to a significant investment in leasehold improvements by the lessee.

 

Various disclosures suggest that the lessee effectively has ownership of the "improvements" which are very long term in nature and there were 4 10-yr renewal options that could be applied "unilaterally" by the lessee. At least under US GAAP, this combination of circumstances means that the capitalized asset is being amortized over the useful life of the assets and not over the period leading to the shorter term of the renewal date. Numbers disclosed concerning amortization and the relative absence of change that occurred at the last renewal (2013) would tend to validate this conclusion. I would expect then that, given an unexpected termination of the lease or non-renewal in 2023, the legal title to the "capital leased assets" may go against a simple writing down of the asset to zero.

 

Interesting case overall in terms of value. The possibility of unlocking of value is highly correlated to a potential catalyst.

 

If looking for potential validation of the underlying assets realizable value, there are potential digging avenues. For instance, access to appraisal value through insurance protection contracts (property/casualty) or through land/property tax documents. My limited experience has shown that the value discovered in those documents can show higher (sometimes more reliable) values than what is reported on the balance sheet.

 

Of course, if you are in a scuttlebutt mode, eventually playing the 18 holes may do the job.

 

Good luck.

 

 

[fishwithwings]

Thanks, Cigarbutt!  Lots of good information here....

 

Thinleyw,

 

Looked at this (partly identified firm...) in more details.

 

The "lease" arrangement is relatively unusual.

 

The initial 10 yr lease was initiated in 2003 and was deemed to be modified shortly after in connection to a significant investment in leasehold improvements by the lessee.

 

Various disclosures suggest that the lessee effectively has ownership of the "improvements" which are very long term in nature and there were 4 10-yr renewal options that could be applied "unilaterally" by the lessee. At least under US GAAP, this combination of circumstances means that the capitalized asset is being amortized over the useful life of the assets and not over the period leading to the shorter term of the renewal date. Numbers disclosed concerning amortization and the relative absence of change that occurred at the last renewal (2013) would tend to validate this conclusion. I would expect then that, given an unexpected termination of the lease or non-renewal in 2023, the legal title to the "capital leased assets" may go against a simple writing down of the asset to zero.

 

Interesting case overall in terms of value. The possibility of unlocking of value is highly correlated to a potential catalyst.

 

If looking for potential validation of the underlying assets realizable value, there are potential digging avenues. For instance, access to appraisal value through insurance protection contracts (property/casualty) or through land/property tax documents. My limited experience has shown that the value discovered in those documents can show higher (sometimes more reliable) values than what is reported on the balance sheet.

 

Of course, if you are in a scuttlebutt mode, eventually playing the 18 holes may do the job.

 

Good luck.