Accounting for Leases

Date Issued: September 2013

From: Matt Murray

1.0: Purpose

The following policy is intended to be a resource for finance professionals at Ingredion (the
“Company”) for guidance on specific accounting methods and application of US Generally
Accepted Accounting Principles (“US GAAP”). This policy does not replace or alter applicable
US GAAP; however, it is merely intended to assist in the consistent accounting across the
Company. Since all circumstances cannot be addressed in their entirety by these
guidelines, professional judgment is necessary in their application. When handling is in
question, please contact the Corporate Controller’s Group (Corporate Controller or Director
of Accounting Policy/Research).

2.0: Persons Affected

This policy is applicable to all domestic and international locations for Ingredion Inc. and all
consolidated subsidiaries.

3.0: Applicable US GAAP Accounting Guidance

ASC 840 – Leases

4.0: Policy

A lease is an agreement conveying the right to use property, plant and equipment. Under a
lease the party obtaining the right to use the leased property is referred to as a lessee and
the party conveying the right to use the property is referred to as a lessor. The accounting
guidance below focuses on leases in which Ingredion is the lessee, as instances in which
Ingredion is the lessor should be extremely rare. The determination of whether leasing an
asset as a method of financing is based on Corporate Treasury policy – please refer to the
respective Treasury policy on the review requirements for purchasing or leasing assets.

4.1 An evaluation of whether an arrangement contains a lease shall be based on the

substance of the arrangement (and not the legal form).

4.1.1 To determine if an arrangement contains a lease, the following general

characteristics exist:

a) The arrangement involves the use of property, plant or equipment

b) The property, plant and equipment is either explicitly or implicitly identified in
the arrangement
c) The arrangement conveys the purchaser/lessee the “right to use” the
specified property, plant and equipment

4.1.2 The definition of a lease does not include agreements that are contracts for
services that do not transfer the right to use property, plant or equipment.

Example: A location has an agreement with an outside payroll provider to provide

payroll processing and tax related services for a period of 3 years. This agreement is
not related to the right to use property, plant or equipment and is therefore not a
lease.
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

4.1.3 Occasionally, an arrangement contains both a lease and a non-lease

component that must be accounted for separately. For example, a lease of a copy
machine for 3 years (lease) and supply of a specified quantity of paper and toner for
the 3-year period by the copier company (non-lease).

4.1.4 If a location is unsure if an arrangement contains a lease, the agreement

should be reviewed by both Legal and the Controller’s Group.

4.2 Take-or-pay contracts are agreements between a seller and a purchaser in which the
purchaser pays certain amounts in exchange for products or services. The purchaser must
make specified minimum payments regardless of whether it receives the contracted product
or service. The accounting guidance for leases results in many take-or-pay contracts being
classified as leases. The specific facts and circumstances should be reviewed in each take-
or-pay contract to determine if the criteria in 4.1 above is met. Any new significant take-or-
pay contracts should be reviewed with the Corporate Controller to determine if a lease
exists.

4.2.1 Agreements in which the purchaser has the ability or right to operate the
property, plant, and equipment or to direct operations (hire or fire employees, etc.)
may constitute a right to control an asset and could qualify as a lease.

4.2.2 Agreements in which the purchaser has the ability or right to control physical
access to the asset while obtaining more than a minor (10%) amount of the output
(not capacity) of the asset would qualify as a lease.

4.2.3 If facts or circumstances indicate that it is remote that one or more parties
other than the purchaser will take more than a minor (10%) amount of the output
that will be produced by the asset, these agreements would qualify as a lease.

Example: A location enters a take-or-pay contract in which the entity agrees to take
92% of the output of a co-generation facility and the remaining 8% will be utilized by
non-related third parties. Due to the fact that it is considered remote that the non-
related third parties will take more than 10% of the output of the co-generation
facility, the agreement should be categorized as a lease and should be evaluated in
accordance with this policy.

4.3 Throughput contracts are agreements between a processor and the owner of a
processing facility that provides for the processor to pay specified amounts periodically in
return for the processing of a product (also known as a tolling agreement). The processor is
obligated to provide specified minimum quantities to be processed in each period and is
required to make cash payments even if it does not provide the contracted quantities.
Generally, this type of contract specifies the quantity of the product to be processed (versus
use of the facility) and, therefore, is not considered a lease.

4.4 An evaluation of whether a lease should be classified as an operating lease or a capital

lease should be determined and approved before the contract is entered into (see Section
4.5).
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

4.4.1 The Corporate Controller should review (before the agreement is finalized) the
entity’s evaluation of lease classifications for unusual, non-recurring or non-standard
leases/contracts. Judgment should be utilized in determining if review by the
Corporate Controller is required.

4.4.2 Leases determined to be capital leases should be approved in the same

manner and under the same thresholds as capital expenditures.

4.5 A lessee should consider whether a lease meets any of the following four criteria below
at its inception to determine the proper classification. A lease that meets any of the four
criteria should be classified as a capital lease. If none of the four criteria below are met,
then the lease should be classified as an operating lease.

4.5.1 Transfer of ownership – the lease transfers ownership of the property to the
lessee by the end of the lease term. This criteria is met if the lease agreement
provides for the transfer of title at or shortly after the end of the lease term in
exchange for a nominal payment or fee.

4.5.2 Bargain purchase option – the lease contains a bargain purchase option, or an
option to purchase the property, plant or equipment for substantially less than its
estimated fair market value.

4.5.3 Lease term is 75 percent or more of the estimated economic life of the leased
property.

Example: A lease calls for rental of a new forklift for 10 years. The estimated
economic life of the new forklift is 12 years. Since the lease secures the
rental of the forklift for approximately 83% of its estimated economic life, this
criteria has been met.

4.5.3.1 If the beginning of the lease falls within the last 25% of the total
estimated economic life of the leased property, then the criteria in 4.5.3 shall
not be used for purposes of classifying the lease.

4.5.4 The present value of minimum lease payments at the beginning of the lease
term equals or exceeds 90% of the estimated fair value of the leased property.

Example: A lease calls for the rental of a new forklift (with an estimated fair
market value of $75,000) for 5 years with minimum annual payments being
$16,000 or total minimum lease payments of $80,000. The present value of
these lease payments at a 5% discount rate is $69,271.63. Since the
$69,271.63 exceeds 90% of the estimated FMV of $75,000, this criteria has
been met.

4.6 Any modifications to existing lease agreements (other than extending the lease term,
see 4.7) should be carefully evaluated to understand the implications to the operating or
capital lease classification. A test is to be performed to determine if a new lease has been
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

created and to determine if that new lease would result in an operating or capital lease
classification.

4.6.1 The first test involves determining whether the classification of the lease, at its
inception, would have been different had the new terms been in force since inception
assuming all other factors of the lease remain unchanged. If, as a result of the first
test, it is determined that the new lease term(s) would have resulted in a different
classification of the lease at its inception, then the revised lease is considered a new
lease. If so, then an entity should move to the second test.

4.6.2 The second test is made as of the date of the change in lease terms and uses
the revised terms of the lease over its remaining life and consideration of other
factors (interest rates, fair value, etc.) as they exist on the date of the change. The
results of the second test performed against the criteria in 4.5 above are used to
determine the required accounting for the new lease.

4.7 An existing lease is considered a new lease agreement for accounting purposes when it
is renewed or extended beyond the original lease term. The exercise of a renewal option
included in the original lease term does not create a new lease for accounting purposes.
The exercise of a renewal option that was not deemed part of the original lease term, or
entering into a new agreement that goes beyond the original lease term, would create a
new lease for accounting purposes.

4.7.1 A new lease for accounting purposes should be classified as an operating or

capital lease at the date of the renewal or extension in accordance with 4.5 above.
The term of the new lease consists of the remaining term of the existing lease plus
any extension or renewal period.

4.7.2 Consideration should be given to deferred rent balances when an operating

lease is extended or renewed. Deferred rent balances result from the amortization of
rent expense on a straight-line basis (when lease payments differ from straight-line)
over the lease agreement in accordance with the Straight-Line Rent Policy. If the
term of an operating lease is extended, then the deferred rent balance should be
amortized over the remaining term of the revised lease so that the new lease also
reflects straight-line rent.

4.7.3 Changes to lease agreements could also result from the lessee obtaining
expanded lease space. The accounting discussed above in 4.6 above would be
followed for the lessee taking on additional lease space.

4.8 Termination of lease agreements before the end of their life would be accounted for
based on the policy Restructuring and Related Actions. This includes paying a termination
fee for exiting a lease contract or ceasing use of the property, plant and equipment without
economic benefit to the entity. See the Restructuring and Related Actions policy for more
information on the recognition and timing of the accounting consequences as it relates to
lease terminations.

4.8.1 Costs to terminate an operating lease are either of the following:

Accounting for Leases
Date Issued: September 2013
From: Matt Murray

a. Costs to terminate the contract before the end of its term

(payment of lease cancellation charge)
b. Costs that will continue to be incurred under the lease for its
remaining term without economic benefit to the entity

4.8.2 A liability for costs to terminate a contract before the end of its term should be
recognized when the entity terminates the contract in accordance with the contract
terms (for example, when the entity gives written notice to the landlord).

4.8.3 A liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit shall be recognized at the cease-use date.

4.9 Rental costs on an operating lease shall be charged to expense as incurred over the
lease term as it becomes payable.  If rent increases over the lease term subject to known
(not subject to contingencies) escalations, the charge to rent expense needs to be
recalculated and will include the increased amount straight-lined over the remaining lease
term. Rent that is paid in advance should be classified as prepaid rent. See Straight-Line
Rent policy for more information on requirements to recognize the cost of a lease equally
over the rental period.

Example: Entity A has a 10-year lease in place for a plant location. Rent is payable on the
1st of each month. On December 26, 2012, Entity A pays rent for January 2013 and the
following entry is recorded:

Dr. Prepaid Rent XX

Cr. Cash XX

By the end of January 2013, the following entry should be recorded to reflect expense
incurred related to the lease:

Dr. Rent Expense XX

Cr. Prepaid Rent XX

4.10 Expenses related to other executor costs (common area maintenance, real estate
taxes, insurance, etc.) for the lease should be recorded to expense as incurred and should
not be straight-lined over the course of the lease as they are generally contingent (variable)
in nature.

4.11 Leases meeting any of the criteria in 4.5 above should be accounted for as a capital
lease. At inception, the lessee shall record a capital lease as an asset and a liability at an
amount equal to the present value at the beginning of the lease term of minimum lease
payments during the lease term, excluding executory costs such as insurance, maintenance,
and taxes to be paid by the lessor.  See 7.2 below for illustrative example below of journal
entries related to a capital lease.
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

4.11.1 If the fair value of the leased asset is less than the present value of minimum
lease payments, then the amount recorded as an asset and an obligation should
equal the fair value.

4.11.2 The asset recorded under a capital lease should be depreciated on a straight-
line basis over its estimated useful life in accordance with Fixed Assets –
Capitalization Thresholds, Useful Lives.

4.11.3 Capital leases should be evaluated for impairment in a same manner as

property, plant & equipment. See Impairment or Disposal of Long-Lived Assets for
more information.

4.12 Sale-leaseback arrangements refer to transactions in which an entity sells the rights to
property, plant and equipment and concurrently leases the asset back from the new owner.
Very specific guidance for accounting for these type of transactions are in place and are
dependent on many factors, such as the length of the lease, the continuing involvement by
the seller, and the amount of the subsequent rental amounts. All sale-leaseback
transactions should be reviewed by the Corporate Controller for the appropriate accounting
treatment.

4.13 Lease agreements in which Ingredion is involved in the construction of the leased
space should be evaluated with the Corporate Controller. Significant involvement in the
construction process (otherwise known as built-to-suit arrangements) by the lessee can
raise questions about whether the lessee is in substance the owner of the property.

4.14 The Company often licenses internal-use software from third parties. The license
agreement for internal-use software should follow the accounting for lease guidance
discussed above.

5.0: Definitions

Executory Costs – additional costs related to the lease (other than rent) which can include
common area maintenance, property or real estate taxes, insurance, and other costs.

Sale-Leaseback – a sale of property, plant and equipment to a buyer with continued active
use of the property by the seller-lessee in consideration for payment of rent.

Lease inception –the date of the lease agreement or commitment, if earlier. A

commitment should be in writing, signed by the parties in interest to the transaction, and
should specifically set forth the principal provisions of the transaction.

Note that the lease inception can be well in advance of when the right to use the property
has begun. For example, a location enters into a commitment on 6/1/2013 to lease a
property starting 1/1/2014.

Bargain purchase option – a provision allowing the lessee, at their option, to purchase
the leased property for a price that is sufficiently lower than the expected fair value of the
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

property at the date the option becomes exercisable and that exercise of the option
appears, at lease inception, to be reasonably assured.

Lease term – the fixed noncancelable lease term plus all of the following:

c. All periods, if any, covered by bargain renewal options

d. All periods, if any, for which failure to renew the lease imposes a penalty on the
lessee in such amount that a renewal appears, at lease inception, to be
reasonably assured
e. All periods, if any, representing renewals or extensions of the lease at the lessor’s
option

Minimum lease payments – the payments that the lessee is obligated to make or can be
required to make in connection with the leased property excluding both of the following:

a. Contingent rentals
b. Guarantees by the lessee to pay executor costs in connection with the leased
property

Cease-use Date – the date the entity ceases using the right conveyed by the contract. For
example, when the entity completely exits a leased property.

6.0: Responsibilities

N/A

7.0: Related Documents

7.1 Illustrative example of accounting for operating leases

7.2 Illustrative example of accounting for capital leases

8.0: Exhibits

Account Table:

SAP Account SAP Hyperion Hyperion Description of

Description Account Description Intended Use of
Accounting for Leases
Date Issued: September 2013
From: Matt Murray

Account

9.0: Change Matrix

Section Reason for Change Effective Date

All Initial issuance 10/1/13