Right-of-Use Assets and Lease Liabilities

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

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 $1,144,913) 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 interesting rate 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 September 1, 2014, October 22, 2014, March 26, 2015, May 7, 2015, July 3, 2015, October 16, 2015, April 6, 2016, April 13, 2016, November 25, 2016 and April 5 2017 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 $2,870,312.

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 Branch Company.

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 Company's accounting for finance leases (formerly referred to as capital leases prior to the adoption of the new lease standard) remained substantially unchanged. 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 $18.3 million and $24.1 million, respectively, as of January 1, 2019.

As of March 31, 2019, the Company has the following amounts recorded on the Company's unaudited condensed consolidated balance sheet:

	March 31, 2019
Assets
Operating lease assets	$	423,080
Finance lease assets		17,884,339
Total	$	18,307,419
Liabilities
Current
Operating lease liabilities	164,241
Finance lease liabilities	3,981,850
Long-term
Operating lease liabilities	258,839
Finance lease liabilities	19,721,692
Total	$	24,126,622

 The future minimum lease payments for annual capital lease obligation as of March 31, 2019 are as follows:

Year	Amounts
2019	$	2,863,111
2020		2,127,609
2021		1,446,313
Thereafter		17,266,509
Total	$	23,703,542

The Company recorded finance interest lease fees of $261,921 and $322,484 for the three months ended March 31, 2019 and 2018, respectively.

Future annual minimum lease payments, for non-cancellable operating leases are as follows:

Year ending December 31	Amount $
2019		78,691
2020		115,679
2021		126,710
2022		102,000
		423,080

The company has recorded operating lease expense of $31,291 and $26,737 for three months ended March 31, 2019 and 2018, respectively

At March 31, 2019 right-of-use assets, consist of:

	March 31, 2019  (Unaudited)
	Operating lease			Finance lease				Total
Lease assets	$	445,470		$	18,094,271		$		18,539,741
Accumulated amortization		(22,390	)		(209,932	)			(232,322	)
Total right-of-use assets, net	$	423,080		$	17,884,339		$		18,307,419

The Company recorded finance lease amortization expense of $209,932 and $nil in depreciation and amortization for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, the amount of depreciation and amortization was $538,224, also included general property and equipment depreciation of $328,292.

The Company recorded operating lease expense of $28,163 and $nil for the three months ended March 31, 2019 and 2018, including operating lease amortization expense of $22,390 and $nil for the three months ended March 31, 2019 and 2018, respectively.