Leases

Corresponding Policy: See ‘Accounting for Leases-University as Lessee’ policy.

Capital Lease

There are a number of steps involved in accounting for a capital lease. They include:

Recording the capital lease in Banner Fixed Assets.
Capitalizing the fixed asset.
Entering a JV in FIS to reclassify the equity associated with the asset to a capital lease payable liability.
Making periodic lease payments of principal, interest and executory costs.
Recording depreciation on the capitalized lease.
Removing accumulated depreciation and asset from the accounting records if the institution does not retain ownership of the asset at the end of the lease.

IRS Lease/Purchase Reporting

For purposes of reporting lease/purchase agreements to the IRS, the following information is needed:

Lessor's Name
Type of property being leased
Lease Inception Date
Lease Issue Price (principal amount of property being leased)

Operating Leases

Accounting for an operating lease is fairly straight forward in that each lease payment is a current year expense as it occurs. If a lease contains scheduled rent increases, the institution must spread the expense evenly over the life of the lease. This may result in the institution recording a liability or a prepaid, depending on the situation.

Recording A Capital Lease

Each capital lease requires an amortization schedule. The amortization schedule uses the effective interest method to break-out the minimum lease payments into principal and interest expense. The interest rate used in the amortization schedule must result in the following two conditions:

At inception date, the present value of the minimum lease payments is less than or equal to the fair market value of the property to be leased.
The principal balance at the end of the lease term is $0.

If the interest rate stated in the lease agreement does not result in the above two conditions, the interest rate in the amortization schedule must be revised to an implicit interest rate that will satisfy the above two conditions.

The present value of minimum lease payments at the inception of the capital lease is recorded as an asset and liability in Banner FIS. Since the capital lease is considered a form of financing and not descriptive of the property itself, the property being leased is recorded as a capital asset based on asset type (e.g., equipment, building, etc.) in the Banner Fixed Assets system.

Recording the capital lease as an asset in Banner Fixed Assets automatically debits the applicable asset account in Banner FIS with an offsetting credit to account code “E1001 NIP Change in Fixed Assets.” The credit to account code E1001 in Banner FIS must then be reclassified to a capital lease liability.

Recording Sale & Leasebacks

The sale of the asset could result in a gain or loss; however, the leaseback of the same asset must be considered in the accounting of the gain or loss. The institution has the same asset and therefore, any gain or loss on the sale should be deferred.

If the leaseback is an operating lease, the deferred gain or loss should be recognized proportionally to the lease payments. If the lease is a capital lease, the deferred gain or loss should be recognized proportionally to lease depreciation.

There are two exceptions to the rule of deferring a gain or loss. The institution may record the gain or loss on the sale immediately if, in the leaseback, it retains usage of a substantially smaller portion (10% or less) of the total asset. Also, a loss is recognized immediately if the asset's fair value at the time of the sale is less than its undepreciated cost. In this case, the amount of the loss to be recognized is the difference between the undepreciated cost of the asset and its fair value.

Sale/Leaseback

There are a number of steps involved in accounting for a sale/leaseback. They include:

Disposing of the fixed asset.
Recording deferred gain or loss on sale unless either of the two exceptions in policy are met.
Determining if the leaseback is a capital or operating lease and recording it appropriately.