08 - 115 Leases and Rental Agreements

A. SUMMARY OF ADMINISTRATIVE PROCEDURE

This statement establishes who has the authority to enter into lease and rental commitments. (For purposes of this paper, the terms "lease" and "rental" are used interchangeably.) It also identifies the difference between capital and operating leases and their respective accounting treatments.

1. What is a lease? A lease is an agreement conveying the right to use property or equipment for a stated period of time with stipulated periodic rental payments. Review of lease agreements is particularly important for several reasons (a.) a lease/purchase analysis needs to be done because it may be less costly to purchase an item than to lease it, (b.) leases have an implicit interest rate involved which may be higher than other sources of funds, and (c.) lease agreements are often presented on forms which, if signed, could expose the campus to unreasonable liabilities against which no insurance is held. Leases fall into two major categories: capital leases and operating leases. These are described below. The distinction between capital and operating leases is important for the proper presentation of USNH financial statements.

a. What is a capital lease? For USNH purposes a capital lease is any lease where (a.) the sum of all payments is $50,000 or more, and (b.) the capital lease criteria in Statement of Governmental Accounting Standards No. 62 (paragraph 213) is met (see summary criteria under B.6 below). The most common capital lease is referred to as a "lease purchase" whereby ownership is transferred to USNH at the end of the lease term.
b. What is an operating lease? For USNH purposes an operating lease is any lease which does not meet the definition of a capital lease as stated in A.1.a. above. Examples include copiers and computers where the sum of all lease payments is less than $50,000, or rental of office space from a third party.

2. Authority to enter into a lease agreement. A department that wishes to lease property or equipment must contact their campus Purchasing Department. If the lease is to be charged to a sponsored program, UNH departments need to submit the agreement to the Sponsored Programs Administration for approval prior to contacting their campus Purchasing Department; similarly, PSU, KSC and GSC departments must submit their agreements to their campus grant administrator.  Campus Purchasing Departments may approve leases where (a.) the sum of all payments is less than $50,000, and (b.) the property is returned to the lessor at the end of the lease, and (c.) the agreement is on an approved USNH form.  In all other cases, Campus Purchasing Departments will work with Campus Finance and Administration Officers and/or the USNH Treasurer for review and approval of the lease agreements.  Certain leases may also require further approval from Legal Counsel, Chancellor, or Trustees, as determined by the Treasurer.

b. DETAILED OPERATING PROCEDURES

1. Reporting requirements. The Treasurer will forward copies of all leases entered into in A.2. above to USNH Financial Services for compilation of a quarterly report. The reports will be used to (a.) update the equipment inventory system (if appropriate) as described below, (b.) accumulate minimum lease payment data for disclosure in the annual audited financial statements, and (c.) track outstanding lease commitments System-wide for management information purposes.

2. Recording operating lease payments. Operating lease payments are treated as a current period expense. Operating lease payments are encumbered at the beginning of each year on a Banner PO document using the 7161 series of account codes.  This includes expenditures for the monthly or annual rental of items of equipment valued at $5,000 or more with a total useful economic life of more than one year; daily/weekly vehicle rentals associated with USNH business travel; vehicles leased by USNH for more than 30 days; one day rentals of function facilities used for meetings, workshops, etc.; expenditures for the rental of real property (land, buildings), either by long-term lease or by month-to-month rental agreement; and all other daily rentals.

3. Recording equipment operating leases in the equipment inventory system. The Property Control Department will record the equipment in B.1.(a.) above in the equipment inventory system if USNH retains title to the equipment after the lease expires. The Controller's Office will provide a quarterly lease commitment report to Property Control so quarterly updating of the equipment inventory files can take place. The equipment will be recorded at zero dollar value to enable operating leases to appear on departmental equipment inventory listings and allow reconciliation of equipment inventory to Banner.

4. Recording capital lease payments. Capital lease payments are recorded as mandatory transfers from Current funds to Plant funds (see Procedure 2-043: Inter-fund Transfers - Mandatory). Capital lease payments are encumbered at the beginning of each fiscal year on a Banner PO document. Capital lease payments should be charged to Banner account code 8O0035. Capital leases recorded in account code 8O0035 can be for equipment, buildings or land. Purchasing will make the determination of whether a lease greater than $50,000 should be recorded as a capital lease or operating lease, based on the criteria in B.6. below, and consultation with the Controller as appropriate. Departments requesting a lease of $50,000 or more should ask Purchasing whether it will be classified as a capital lease or operating lease before entering the PO document; otherwise, account codes may need to be changed later. Purchasing will notify the Controller's Office of all capital leases entered into.

5. Recording capital leases in the equipment inventory system and the plant fund balance sheet. If a lease is classified as a capital lease, USNH must record an asset and a corresponding lease liability on the Plant fund balance sheet. The leased asset is capitalized at the present value of the minimum lease payments  or the fair market value of the leased asset at the inception of the lease, whichever is lower. The leased asset should generally be depreciated like all other USNH assets over its estimated economic life. The Controller's Office is responsible for recording the asset, liability, depreciation, mandatory transfer into the Plant fund (the credit side of the mandatory transfer recorded by the department in 3. above), and the interest expense and reduction of liability that occurs in the Plant fund each time a capital lease payment is made to the lessor. USNH Financial Services will notify Property Control on a quarterly basis of any capital leases which need to be recorded in the equipment inventory system.

6. Summarized provisions of GASB 62, paragraph 213. Lease agreements that meet one or more of the following criteria, at the inception of the lease, must be classified as capital leases [if the sum of all payments is $50,000 or more]:

a. The lease transfers ownership of the property to USNH at the end of the lease term.
b. The lease contains a bargain purchase option.
c. The lease term is equal to 75 percent or more of the estimated economic life of the leased property (this criterion is not applicable when the lease term begins with the last 25 percent of the economic life of the asset.)
d. The present value of the minimum lease payments (excluding insurance and maintenance or similar costs) equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor over any related investment tax credit retained by the lessor, if applicable. The discount rate used should be USNH's incremental borrowing rate or the rate implicit in the lease, whichever is lower.

Leases not meeting any of these criteria are classified as operating leases.


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