Financial Accounting Standard (FAS)-13 defines a lease as an agreement that conveys the right to use assets for a stated period. A lease that transfers substantially all the benefits and risks inherent in the ownership of property is called a capital lease.
A capital lease is a lease that meets one or more of the following criteria:
- Is there a transfer of ownership at the end of the lease?
- Is the lease term 75% or more of the estimated economic life of the leased property?
- Is there a bargain purchase option in the lease?
- Is the present value of the minimum lease payments 90% or more of the fair value of the property?
In PeopleSoft, the following account codes are commonly used to properly account for a capital lease:
810500 - Lease Equip Purchase Principal
810600 - Lease Equip Purchase Interest
Departments need to use these codes when they create a SPO for the capital lease payment.
If a lease does not meet any of the above criteria, then it is an operating lease. Operating leases are treated like a series of rental payments which are charged as expenses.
How do I know if it’s a capital lease? You don’t have to! If the department chooses to enter an equipment lease for equipment $5,000 or more, contact the Finance Office.
Contact – Brett Yamashita at 303.315.22550 or Brett.Yamashita@ucdenver.edu to review the lease for capital/operating determination.