-- GASB Codification Section L20
-- FASB Statement of Financial Accounting Standards Number 13
See Chart of Accounts: Capital Leases Payable 214100, Capital Leases Payable - Non-current 224100, and
A lease is an agreement between a lessor and a lessee that gives the lessee the right to use property, plant, or equipment for a specific period of time in return for stipulated cash payments. Leases are classified as either capital or operating. A capital lease is an agreement that meets one or more of the criteria set forth in FASB Statement 13 for lease capitalization. A capital lease essentially transfers the benefits and risks of ownership of the leased asset to the lessee. Leases which do not meet any of the criteria set forth in FASB Statement 13 are operating leases.
GASB Codification Section L20 provides that, subject to the distinctions of governmental fund accounting, FASB Statement No. 13, Accounting for Leases, as amended and interpreted, should be the guidelines for accounting and financial reporting for lease agreements, except for operating leases with scheduled rent increases.
GASB Cod. Sec. L20.108 - .112 contains the guidelines for operating leases with scheduled rent increases. These guidelines are set forth below.
Operating Leases with
Scheduled Rent Increases
This section should be followed by all agencies, universities, colleges, and component units of the state reporting entity, regardless of the fund type used to report the lease transaction.
Scheduled rent increases are increases that are fixed by contract. They take place with the passage of time and are not contingent on future events. The rent increases may, for example, be based on such factors as anticipated increases in costs or anticipated appreciation in property values, but the amount of the increase is specified in the lease agreement. In contrast, in leases with contingent rentals, the changes in lease payments are based on changes in specific economic factors, for example, future sales volume, future inflation (for example, tied to a specific economic indicator), and so forth.
Transactions arising from operating leases with scheduled rent increases should be measured based on the terms of the lease contract when the pattern of the payment requirements, including the increases, is systematic and rational. The following are examples of payment schedules that are considered systematic and rational.
b. Lease payments are required to be made on a basis that represents the time pattern in which the leased property is available for the use of the lessee.
b. The operating lease transactions may be measured based on the estimated fair value of the rental. The implicit financing by the lessor of the lessees cash flow should be accounted for using the interest method. That is, interest should be calculated for each period so that it results in a constant rate of interest over the lease term on the periods outstanding accrued lease receivable or payable. (Note: If the fair value of the rental is not reasonably estimable, the operating lease transactions should be measured on a straight-line basis over the lease term.)
Entities that report operating leases with scheduled rent increases in governmental and similar trust funds should recognize rental revenue or expenditures each period using the modified accrual basis of accounting. That is, the amount calculated in accordance with the measurement criteria in the preceding paragraphs above should be recognized as revenue to the extent it is available to finance expenditures of the fiscal period. Accrued receivables should be reported in the fund and offset by deferred revenue for the portion not yet recognized as revenue. The lessee should recognize expenditures and fund liabilities to the extent that the amounts are payable with expendable, available financial resources. Any remaining accrued liabilities calculated in accordance with the measurement criteria paragraphs above should be reported in the GLTDAG. Lessees should report the total amount reported for the year in accordance with the measurement criteria in the paragraphs above through disclosure in the notes to the financial statements.
According to FASB Statement 13, a lease is considered a capital lease if it meets any one of the following criteria:
The lease amount recorded is the lesser of the present value of the rental, and other minimum lease payments, or the fair value of the leased property. Capital leased assets must follow the same depreciation policy as similarly owned fixed assets in the fund. If depreciated, the period is restricted to the lease term rather than the life of the asset, unless the lease provided for transfer of title or includes a bargain purchase option. The periodic rental payments are treated as payments of the lease obligation and interest is recorded on the remaining balance of the obligation. This is similar to other types of debt payments.
When leasing land, the lease is classified as an operating lease unless it provides for transfer of title or includes a bargain purchase option. If both land and buildings are leased, FASB Statement 13 specifies whether and how the elements are to be separated and which criteria should be applied. When only part of a building is leased, FASB Statement 13 provides guidance in determining whether the fair value of that part of a building can be determined objectively.
In governmental and expendable trust funds, general fixed assets acquired by a capital lease agreement should be capitalized in the general fixed assets account group at the inception of the agreement in an amount determined by applying the guidelines in FASB Statement 13, as amended. A liability of the same amount should be recorded simultaneously in the general long-term obligations account group. When a capital lease represents the acquisition or construction of a general fixed asset, the acquisition or construction of the general fixed asset should be reflected as an expenditure and other financing source, consistent with the accounting and financial reporting for general obligation bonded debt.
Lease accounting in proprietary, nonexpendable trust, pension trust, and college and university funds should follow FASB Statement 13 without modification. In these funds, capital leases are accounted for and reported entirely within the fund that entered into the lease or utilizes the asset.
To determine whether a lease is an operating lease, the criteria listed above for capital leases must be applied. If it does not meet any of the criteria, the lease is considered to be an operating lease.
Operating lease payments are recorded as expenditures or expenses of the related funds when paid or incurred. Neither an asset nor an obligation is recorded for operating leases. Accordingly, rental payments are recorded as rental expenditure/expense in the operating statement.
The disclosure requirements of FASB Statement 13 should be included in the notes to the financial statements. Disclosures are required for both capital and operating leases.