Accounting for Lease-Purchases (Capital Leases)

EFFECTIVE: 7-1-80 REVISED: 7/84, 04/00
_________________________________ David E. Sundstrom, Auditor-Controller
Lease purchases of fixed assets are to be accounted for in a manner similar to purchases of fixed assets with long-term credit terms.
1.1 Purpose
To account for lease purchases in accordance with generally accepted accounting principles.
1.2 Authority
Authority Subject
Board of Supervisors' Resolution No. 82-162 Authorizes the Auditor-Controller to prescribe accounting policies.

Accounting Standards and Procedures for Counties, State of California, Ch. 11.17 to 11.20.

Defines capital and operating leases.
Financial Accounting Standards Board Statement No. 13, as amended and interpreted. Establishes standards of financial accounting and reporting for leases.
1.3 Definitions
1.3.1 Lease Purchases (Capital Leases)
Leases of fixed assets which transfer substantially all benefits and risks of ownership to the lessee. A lease meeting any one of the following criteria is considered to be a lease purchase:
  1. The lease transfers ownership of the property to the County by the end of the lease term.
  2. The lease contains a bargain purchase option, exercisable at lessee's option, to purchase the lease property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable so that exercise of the option appears, at the inception of the lease, to be reasonably assured.
  3. The lease term is equal to at least 75% of the remaining estimated economic useful life of the leased property. (This is not applicable if the lease begins in the last 25% of the asset's total useful life.)
  4. The present value of the required lease payments equals or exceeds 90% of the fair value of the lease property. (This is not applicable if the lease begins in the last 25% of the asset's total useful life.)
1.3.2 Operating Leases
All leases other than lease purchases. Lease payments are charged to the appropriate lease expenditure/expense account, Object Code 2100 (Rents and Leases - Equipment) for equipment and Object Code 2200 (Rents and Leases - Buildings and Improvements) for real property.
2.1 Budgeting
Appropriations for lease purchases are to be budgeted using the appropriate debt service (debt principal and interest) expenditure objects (see Exhibit II). Principal payments are to be budgeted and recorded in Object Code 3251 (Lease Purchase Principal Payment) and interest payments in Object Code 3351 (Lease Purchase Interest Payment).
2.2 Identification of Lease Purchases
All lease purchases must be identified as such by the acquiring department/agency or by CEO/Purchasing. At the inception of any lease, the department or agency must complete the Lease Certification Form (Exhibit I) to determine whether the lease is a lease purchase or operating lease. The head of the department/agency signs the completed form, which is then forwarded to the Auditor-Controller General Ledger Unit for approval. The department/agency should maintain copies of the documentation that supports the lease classification. Purchase Orders must have a completed principal/interest payment schedule (see Exhibit II) attached to the Auditor-Controller's copy. When there are multiple items being acquired on a Purchase Order, the principal/interest totals for each fixed asset must be provided. The Deputy Purchasing Agent should obtain this payment schedule from the vendor. Note: Some leases fall under the provisions of the County's Public Financing Policies and Procedures and may require approval by the Public Finance Advisory Committee prior to submission to the Board. The CEO Public Finance Manager should be consulted for guidance prior to initiating any lease.
2.3 Accounting Treatment
2.3.1 Capitalization
Upon making the first payment, the Auditor-Controller capitalizes the asset by recording it in the Fixed Asset Accounting System. The recorded cost of the asset is the total principal to be paid over the life of the lease.
2.3.2 Depreciation
The asset is depreciated in accordance with the normal depreciation policy of the lessee fund over the asset's life.
2.3.3 Principal Balance
Each year, the General Long-Term Debt Account Group is adjusted by the Auditor-Controller Department to reflect the remaining principal balance due on lease purchases by non-proprietary funds.
2.3.4 Financial Statement Presentation
For financial statement presentation, debt principal payments by proprietary funds (enterprise and internal service funds) are reclassified as reductions of debt principal instead of expense.
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