RIGHT-OF-USE ASSETS AND LEASE LIABILITIES | NOTE 8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES On January 1, 2019, the Company adopted Accounting Standards Codification ("ASC") Topic 842, "Leases" ("new lease standard"). The new lease standard was adopted using the optional transition method approach that allows for the cumulative effect adjustment to be recorded without restating prior periods. The Company has elected the practical expedient package related to the identification, classification and accounting for initial direct costs whereby prior conclusions do not have to be reassessed for leases that commenced before the effective date. As the Company will not reassess such conclusions, the Company has not adopted the practical expedient to use hindsight to determine the likelihood of whether a lease will be extended or terminated or whether a purchase option will be exercised. Finance lease On June 5, 2013, Jiarun entered into a lease agreement to lease its hospital building from Harbin Baiyi Real Estate Development Co., Ltd ("the Lessor"), which is owned by Junsheng Zhang, a related party. The Lease has a term of 30 years, requiring annual prepayments of a rent of RMB7,000,000. The first payment was made on September 1, 2014. At the end of the leasing period, a final payment will be made to settle the total leasing amount. Both parties agreed for Jiarun to pay RMB3,000,000 as deposit at the execution of the Leasing agreement, which will be deducted from the final rental settlement. In accordance to accounting principles and treatment, this payment was booked as deposit in our accounts. The Lessor shall return the premium for lease to Jiarun at expiration of the Contract or pledge the deposit as part of rents for the last period or periods in 2043. The implicit interest rate, which determined the rental fee after fair value was amortized, was calculated at 6.55%, which is the benchmark interest rate announced from The People's Bank of China. After the completion of all payments, the ownership of the lease item will be transferred to Jiarun. The leasing agreement for our hospital building contains the following provisions: ● Rental payments of RMB7,000,000 (equivalent to $1,004,593) per year, payable at the beginning of September. ● An option allowing the lessor to extend the lease for thirty years beyond the last renewal option exercised by the Company. ● A guarantee by the Company that the lessor will realize $nil from selling the asset at the expiration of the lease This lease is a capital lease because its term (30 years) exceeds 75% of the building's estimated economic life. In addition, the present value ($15,185,032) of the minimum lease payments exceeds 90% of the fair value of the building ($15,721,295). ● Accumulated annual amounts resulting from applying an interest rate of 6.55% to the balance of the lease obligation at the beginning of each year. The lease obligation is increased by the amount of the prior year's interest, the amount of the net rental payment at the beginning of each year; and this amount represents the guaranteed residual value at the end of the lease term. On May 7, 2015, July 3, 2015, October 16, 2015, April 6, 2016, November 25, 2016, April 5 2017 and May 25, 2019 Jiarun entered into several lease agreements to lease medical equipment and an elevator from three lease finance companies, which are all unrelated third parties, for three to five-year periods, in which Jiarun is required to make monthly or quarterly payments toward the leases. The Company was also required to pay deposits up front, which deposits will later be offset against the last quarterly payment. The medical equipment and elevator will be transferred to Jiarun upon the completion of the agreement. On March 25, 2019 Jiarun entered into a sale and leaseback agreement for the sale-leaseback of properties from Haitong Hengxin International Leasing Company Limited, with a collective net value of $2,609,047. Operating lease In August 2017 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from August 2017, JHCC is committed to make lease payments of approximately $36,881 per year for 5 years. This office is used for outpatient services by 2nd Branch Hospital. In December 2017 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from December 2017, JHCC is committed to make lease payments of approximately $68,128 per year for 5 years. This office is used by 1 st The Company's adoption of the new lease standard included new processes and controls regarding asset financing transactions, financial reporting and a system-related implementation required for the new lease standard. The impact of the adoption of the new lease standard included the recognition of right-of-use ("ROU") assets and lease liabilities. The adoption of the new lease standard resulted in additional net lease assets and net lease liabilities of approximately $14.06 million and $14.14 million, respectively, as of September 30, 2020. As of September 30, 2020, the Company has the following amounts recorded on the Company's unaudited condensed consolidated balance sheet: September 30, December 31, (Unaudited) Assets Operating lease assets $ 255,646 $ 331,693 Finance lease assets 13,803,342 15,309,796 Total $ 14,058,988 $ 15,641,489 Liabilities Current Operating lease liabilities 117,681 111,414 Finance lease liabilities 1,635,519 2,569,007 Long-term Operating lease liabilities 137,965 220,279 Finance lease liabilities 12,253,566 13,075,654 Total $ 14,144,731 $ 15,976,354 The future minimum lease payments for annual capital lease obligation as of September 30, 2020 are as follows: Year Amounts 2020 $ 1,263,151 2021 2,155,864 2022 1,134,231 Thereafter 9,335,839 Total $ 13,889,085 The Company recorded finance interest lease fees of $275,126 and $231,063 for the three months ended September 30, 2020 and 2019, and recorded finance interest lease fees of $816,509 and $812,057 for the nine months ended September 30, 2020 and 2019, respectively. Future annual minimum lease payments, for non-cancellable operating leases are as follows: Year ending December 31 Amount $ 2020 30,034 2021 124,992 2022 100,620 255,646 The company has recorded operating lease expense of $27,900 and $24,112 for three months ended September 30, 2020 and 2019, and recorded operating lease expense of $81,764 and $80,864 for nine months ended September 30, 2020 and 2019 respectively At September 30, 2020 right-of-use assets, consist of: September 30, 2020 December 31, 2019 Operating Finance Total Operating Finance Total Lease assets $ 337,410 $ 14,619,851 $ 14,957,261 $ 432,892 $ 16,390,259 $ 16,823,151 Accumulated amortization (81,764 ) (816,509 ) (898,273 ) (101,199 ) (1,080,463 ) (1,181,662 ) Total right-of-use assets, net $ 255,646 $ 13,803,342 $ 14,058,988 $ 331,693 $ 15,309,796 $ 15,641,489 The Company recorded finance lease amortization expense of $275,126 and $391,314 in depreciation and amortization for the three months ended September 30, 2020 and 2019, respectively, and recorded finance lease amortization expense of $816,509 and $929,538 in depreciation and amortization for the nine months ended September 30, 2020 and 2019, respectively. For the three and nine months ended September 30, 2020, the amount of depreciation and amortization was $649,726 and $1,808,738, also included general property and equipment depreciation of $374,600 and $992,229. The Company recorded operating lease expense of $73,174 and $24,112 for the three months ended September 30, 2020 and 2019, and recorded operating lease expense of $159,782 and $80,864 for the nine months ended September 30, 2020 and 2019, including operating lease amortization expense of $27,900 and $24,573 for the three months ended September 30, 2020 and 2019, and $81,764 and $75,003 for the nine months ended September 30, 2020 and 2019, respectively. |