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Lease Accounting

Science Equipment

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:

  1. Is there a transfer of ownership at the end of the lease?
  2. Is the lease term 75% or more of the estimated economic life of the leased property?
  3. Is there a bargain purchase option in the lease?
  4. 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 303.315.2254 or to review the lease for capital/operating determination.

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