Bargain-purchase-price option

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Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.

Bargain-Purchase-Price Option

A lease in which the lessee has the option to buy the underlying asset at less than its fair market value at the end of the lease. For example, one may enter into an agreement to rent a house for five years with the option to purchase the house at the end of five years; the price is determined at the beginning of the lease, but must be substantially less than the market value of the house. If the lease is non-cancelable, the Financial Account Standards Board requires that it be considered a capital lease. See also: Rent-to-own.
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This treatment is unlike the calculation of the receivable on the lessor's books, which specifically excludes any guarantees by the lessee or bargain purchase options.
Under the R&R approach, assets are 1) the receivable calculated as the present value of the estimated lease payments--the minimum lease payment for the lessor does not include any guaranteed residual value when the lessee is not entitled to the residual profits on the residual and does not include any bargain purchase option, only the lessee's required lease payments are included--using the rate the lessor charges the lessee (generally, the implicit rate in the lease for equipment leases), and 2) the residual derived by subtracting the receivable from the book value of the underlying leased asset, plus any profit and deferred profit.
Possible cash payments from a guaranteed residual value or from a bargain purchase option will not be included in the minimum lease payment, and thus will not be included in the receivable because of the following:
Bargain purchase option lease arrangements will likely be outside the scope of the new accounting rules and will be treated as a financing and purchase of the underlying asset.
Note: The Lessor does not include any residual value guarantees by the lessee or any bargain purchase option in the lease payments calculation.
There is much more to be discussed including financial statement reporting and disclosures, and we have not yet considered bargain purchase options, residual value or sale-leaseback arrangements.
The bargain purchase option allows the lessee to purchase the asset at a reduced price at the end of the lease.
This month's column continues with an explanation of a capital lease that includes a bargain purchase option.
The value of the bargain purchase option is included in the total.
At the end of the lease, when the bargain purchase option is exercised, the entries made are shown in Table 3, A.
If at the end of the lease the lessee decides not to exercise the bargain purchase option, the lessor may also recognize a loss.