Policy
FIACCT 09-21_00 Fixed Assets – Leases
Effective: March 16, 1998
Revised: July 2, 2001
Purpose
This policy details financial reporting requirements necessary for GAAP reporting of land, buildings, equipment, computers, software, etc. leased by the State.
Definitions
Bargain Purchase
A provision allowing the State, to purchase the leased property for a price that is much lower than the fair market value during the lease term. The price is usually low enough that a reasonable person would likely exercise the purchase option.
Cancelable Lease
A lease is cancelable if it contains a cancellation clause that is not dependent on legislative funding/action. If the cancellation clause is dependent on legislative funding/action only, the lease is not cancelable for the purpose of this definition.
The Division of Finance will determine the classification of cancelable leases.
Capital Lease
A lease that transfers substantially all the benefits and risks inherent in the ownership of property. Capital lease assets are recorded as fixed assets of the State. The amount of the lease is recorded in a Lease Financing Cost account and expenditures for such assets are classified as capital outlay. The Division of Finance will determine if a lease is to be classified as a capital lease and will inform the agency of the proper accounting. All capital leases must have prior legislative approval before being issued.
Economic Life
The estimated remaining period that the property is expected to be usable for its intended purpose.
Executory Costs
Costs to maintain the leased property in functional condition such as insurance, maintenance, and taxes.
Fair Market Value
The estimated price for which the property could be purchased on the open market on the lease inception date.
Fixed Asset
Assets acquired for use in operations which are not for resale or investment purposes and have a useful life greater than one year and cost $5,000 or more. Fixed assets can include buildings, machinery, land, motor vehicles, furniture, office equipment, computer equipment, computer software, licensing agreements, betterments, etc.
Governmental Funds
Governmental funds include the State General Fund, Special Revenue Funds (Uniform School Fund and Transportation Fund), Capital Projects Fund, and Debt Service Funds.
Implicit Interest
Rate The interest rate that would make the present value of future minimum lease payments equal to the fair value of the property at the inception of the lease.
Inception Date
The beginning date of the lease.
Lease
A contractual agreement giving the right to use assets for a specified period of time.
Lessee
The party making lease (rental) payments to the lessor (tenant if the lease is for real estate).
Lessor
Owner of the property being leased (landlord if the lease is for real estate).
Minimum Lease Pmt
The payments that the State is obligated to make for the leased property (excluding executory costs such as insurance, maintenance, and taxes). Basically, this is the minimum rental payments required by the lease.
Non-Disclosed Lease
A lease is not disclosed in the Comprehensive Annual Financial Report (CAFR) if lease payments are $1,000 or less per year, or if the term is one year or less, or if it has a cancellation clause of one year or less. The Division of Finance will determine the classification of all leases.
Operating Lease
A lease that is not a capital lease. Operating lease assets are not considered property of the State. Such expenditures are considered rent. The Division of Finance will determine the classification of all leases.
Proprietary Funds
These are Enterprise or Internal Service Funds. Enterprise Funds account for operations similar to a private business or enterprise. Internal Service Funds (ISF) account for goods or services provided by one state agency to other state agencies, on a cost reimbursement basis. For instance, Alcoholic Beverage Control is an Enterprise Fund and the State Motor Pool is an ISF.
Policy
A. Prior to entering into capital lease agreements, all leasing plans must be approved by the Legislature and the Division of Finance as required by the following sections of the Utah Code:
UCA 63A-1-112 (Certificates of participation – Legislative approval required – Definition)
UCA 63-38-2 (Governor to submit budget to Legislature – Contents – Preparation – Appropriations based on current tax laws and not to exceed estimated revenues)
UCA 63-38-11 (Director of Finance to exercise accounting control – Work programs – Allotments and
expenditures)
UCA 63A-3-103 (Fiscal procedures provided by director of division – Application to institutions of
higher education)
This is usually accomplished by including the leasing plan with the agency budget request. If an agency is not sure of the proper lease classification, please contact the Division of Finance for assistance.
B. If the lease is for data processing, micrographic, printing, or telecommunications equipment, prior approval must be obtained from the appropriate agency or committee as outlined in the Purchasing – Delegations – Utilizing/System Control policy in the PURCHASING section of this manual.
C. Each agency that enters into a lease agreement will complete form FI 9, Lease Obligation Record and attach three copies to the official lease contract sent to the Division of Finance. One copy will be retained by Finance, one will be sent to DFCM (if land or buildings), and one will remain with the lease.
D. All leases will be categorized by the Division of Finance as Capital, Operating, or Nondisclosable.
E. Operating lease expenditures are considered the same as rent, and payments should be coded to rental Object codes (6161–6165, 6587, or 6588).
F. Capital leases are recognized immediately as assets of the State and must be recorded in FINET Fixed Assets. Capital leases of Governmental type funds are recorded in the General Fixed Asset Account Group (GFAAG) and the corresponding liability is recorded in the General Long-term Debt fund. Capital leases of Proprietary type funds are recorded in their respective funds, along with the lease liability.
G. Capital lease obligations for Governmental type funds are recorded for budgetary purposes. Therefore, capital leases for these funds require an appropriation budget adjustment in the inception year for the present value of future minimum lease payments. See the Appropriation Budgets – Modifying policy in the BUDGETS section of this manual.
H. If a lease agreement is modified, agencies must complete a new FI 9 and send it to Finance attached to the modification.
I. All lease expenditures for Governmental type funds should be encumbered. See the Price Agreements
policy in the PURCHASING section of this manual.
Background
A lease that transfers substantially all of the benefits and risks of ownership should be recorded as a fixed asset and the incurrence of an obligation by the lessee (capital lease). Other leases should be accounted for as operating leases, that is, rental of property, or non-disclosed leases.
DAS – Finance classifies a lease as either a capital lease, an operating lease, or a non-disclosed lease. If a particular lease meets one or more of the following classification criteria it is a capital lease:
A. The lease transfers ownership of the property to the lessee by the end of the lease term.
B. The lease contains an option to purchase the leased property at a bargain price.
C. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
D. The net present value of future minimum lease payments, excluding executory costs, equals or exceeds 90 percent of the fair market value of the leased property.
Procedures
Responsibility
Action
Agency
1. Prepare budget documents to include capital lease requests, if any, and analysis per instructions given by the Office of Planning and Budget.
State Legislature
2. Approve or disapprove all capital lease requests.
Agency
3. Submit all lease agreements to the Division of Finance for final signatures, assignment of a contract number, and lease classification. Include with the lease agreement, three copies of the form FI 9, Lease Obligation Record:
Contract No is required only if this is an amendment to an existing lease. If this is a new lease, leave blank.
Amendment No is required only if this is an amendment to an existing lease. If this is a new lease, leave blank.
Replaces Contract No is required only if this replaces an existing lease. If this does not replace a new lease, leave blank.
Enter the Date Prepared, Department, and Division name of the agency leasing the asset.
Enter the Agency Person Responsible for Lease and Phone. Finance may contact this person to clarify any parts of the lease.
Complete section A if this lease is for equipment.
Complete section B if this lease is for Land or a Building (or both).
Complete section C, line 1 for the Lessor (name and address of person who owns the asset that is being leased to the State).
Lines 2 and 3 detailing the payment schedule are required.
Lines 4 through 14 on the back should be completed when applicable.
4. All lease expenditures for Governmental type funds should be encumbered. See the Price Agreements policy in the PURCHASING section of this manual.
Division of Finance
5. Assign the lease number; review the FI 9; classify the lease as capital, operating, or disposable; and prepare an amortization schedule when applicable. If the lease is a Capital Lease, send instructions to the leasing agency advising them of all entries required to record this lease in accordance with GAAP. Send a final signed copy of the lease and FI 9 to the leasing agency.
Agency
6. Receive a final signed copy of the lease and FI 9 from DAS – Finance. If the lease is a Capital Lease the agency must process an FA transaction to establish the asset record in FINET Fixed Assets and follow the instructions received from Finance. If the lease is an Operating or Non-disclosed lease, record lease payments as rental expense.
7. Should an agency modify an existing lease, go to Step 1 and repeat this process for each modification.