Recording and Tracking Capital and Operating Leases

The recording and tracking of Capital and Operating Leases is somewhat complicated and the University is required to be in compliance with Financial Accounting Standards Board (FASB) Statement No. 13 and Government Accounting Standards Board (GASB). This guide is not intended to go through the entire behind-the-scenes analysis of how to record leases, but rather provide guidance on the day to day Department and Controller’s Office processes as it relates to equipment.Capital Lease or Installment Purchase Lease

A Capital Lease or Installment Purchase is a lease in which the University executes a written contract with another party through Campus Procurement and Contracts to purchase personal or real property with scheduled specific installment payments of money during the life of a contract. Title to the property remains with the lessor until the total contract amount has been paid. The University has the right to take possession of the property at the end of the contract, or earlier, subject to payment of any outstanding principal and the buy-out amount specified in the contract.

If the current market value is $100,000 or more it qualifies as a Capital Lease. Below $100,000 it is classified as an Installment Purchase.

Characteristics of a Capital Lease or an Installment Purchase Lease

  • Has specific beginning and ending dates
  • Interest rate is stated and fixed for the life of the lease
  • Almost always has a buyout amount (sometimes this will be for $1 only)
  • Provides for transfer of ownership upon payment of the lease and payment of the agreed buy out amount
  • Period of lease is at least 75% of the estimated economic life of the equipment
  • Present value of the lease payments is as least 90% of the fair market value of the equipment
  • Amount of the installment payment will be noted on the lease contract
  • Lease is non-cancelable

The Payment Process

  • Campus Procurement creates the Purchase Order which establishes the payment amounts, duration and interest.
  • Capital Accounting has responsible to:
    • Set-up of the Capital Lease in PeopleSoft Asset Management
    • Enter the lease invoice into the PeopleSoft Accounts Payable module
    • Divide the payment into principal and interest based on the amortization schedule
    • Classify the principal and interest components to the correct Account pairs below:
Description Principal Account Interest Account

Cap lease - non-comp

57503 57504

Cap lease - computer

57501 57502
  • If sales tax was not paid by the lessor when the financing occurred, Capital Accounting will add Use Tax to the monthly payment.
  • In general, a copy of the monthly invoice is not sent to the department for review or approval. Approval is implied when the purchase order is authorized. Lease payments must be made according to the scheduled due dates established in the purchase order and contract terms. The Controller’s Office has the signed Purchase Order and Contract on file which provides the department’s agreement to the monthly payment.
  • Questions concerning Capital Lease payments should be directed to Capital Accounting at 415.502.3042.

The Year End Closing Process for Capital Lease/Installment Payments in the General Ledger

As stated in the introduction, we are required to record leases according FASB, GASB and University guidelines. The end result is that at the end of the year we are required to reclassify both the principal and interest payments made within the fiscal year to Equity. At a high level the following outlines the process:

  • The total principal and interest payments made to the Accounts in the chart above during the year are accumulated for each lease by Fund/Dept ID/Project./Activity Period/Function
  • Journals are created as follows:

Financial Journal (SC 566)

  • Principal and Interest (Lump Sum) - Debit Transfer Account, Fund, Dept ID, Project, Activity Period, Function
  • Principal – Credit Account (see chart below), Fund, Dept ID, Project, Activity Period, Function
  • Interest – Credit Account (see chart below), Fund, Dept ID, Project, Activity Period, Function
    • Reclass Accounts

      Description Principal Account Interest Account

      YE recl cap leas non-comp

      57507 57508

      YE recl cap lease comp

      57505 57506

      Note: The Accounts above are reserved for Controller’s Office use only.

Important Notes

  • End result of the above transactions does not affect the overall chartstring balance.
  • Reclass Accounts eliminate manual recalculation and adjustment of Facilities and Administrative Cost (F&A) by the Controller’s Office when closing out grants and contracts.
    • Principal Payments are exempt/excluded from F&A for base codes where equipment purchases are exempt from F&A.
    • Interest Accounts are not exempt/included in F&A for base codes where supplies and service costs are allowable for F&A.
  • DepartmentsDo not process journals to transfer or modify these year-end reclassification journals. If you feel there is something incorrect, please contact Capital Accounting at 415.502.3042 in the Controller’s Office to make any required adjustments.

Other Types of Leases or Contracts

Operating Lease

This is a straight lease of equipment. There is no expectation that the University will take possession of the equipment at the end of the lease.

  • There may or may not be a beginning and ending date of the lease and it can be extended with a Change Order issued by Purchasing Services.
  • There may be a buyout option and if so, the price is generally the fair market value of the equipment.
  • This is no interest associated or accrued as there is with Capital Leases.
  • All payments are made to Account 57601 – Operating lease payments.
  • There are no year- end reclassifications of payments as is done for Capital Leases.
  • Operating Leases are considered as an operational cost.
  • Questions concerning Operating Leases are to be directed to the Controller’s Office Solution Center.

Repair and Maintenance Contract

This is a contract for the repair and maintenance of equipment and is not considered as part of a Capital Lease or Installment Purchase. A monthly payment is made by Campus Accounts Payable. The contract may be extended with a Change Order from Campus Procurement and Contracting. Payments are charged to the following Account:

Cost per Copy Contract

This is a contract for the use of a photocopier based on the number of copies made each month. This contract is similar to a repair and maintenance contract. This is no expectation of ownership at the end of the contract. Payments are charged to the following Account:

  • 54051 – Repairs-equip/instr/vehicles
  • 55300 – Reproduction/photography svcs