These regulations govern the acquisition of equipment by university departments
through installment purchases or capital lease agreements. The Financial Accounting
Standards Board and the federal government have issued guidelines to clearly
define the accounting treatment for such transactions. Those guidelines are
reflected in this policy.
Lease Classification. A lease can be classified either as a capital
lease or an operating lease. When a lease meets any of the following criteria,
it should be classified as a capital lease (installment purchase),
and a corresponding asset and liability must be recorded on university records:
Property Ownership. The lease transfers ownership of
the property to the university by the end of the lease term.
Purchase Option. The lease contains an option to purchase
the leased property at a bargain price (significantly lower than the property's
fair value when the option is exercised).
Lease Term. The lease term equals or exceeds 75 percent
of the estimated economic life of the leased property.
Rental Payments. The present value of rental payments
equals or exceeds 90 percent of the value of the leased property.
If none of these criteria are met, the lease is classified as an operating
lease. Neither an asset nor a liability is recorded on university records.
Required Accounting. Departments that purchase equipment on installment
or capital lease agreements should be aware of the required accounting procedures
so that the equipment may be capitalized (and tagged) and the corresponding
liability recorded on official university records.
Required Contracts. University purchase orders may not be issued
to acquire equipment under an installment or capital lease. (Purchase orders
can be issued for the current and subsequent year's obligation of funds.)
Instead, separate installment or capital lease contracts must be completed.
These contracts should reflect all pertinent facts and conditions, including
provisions or outright purchase of the equipment during the lease term and
amortization schedules for the equipment under contract. All contracts must
go through the university's contract review process.
The departmental responsibilities for installment and capital lease contracts are as follows:
Terms. The purchasing department is responsible for
securing the most favorable terms for the university, whether through
an operating lease or a capital lease agreement.
Quotations. The quotations received by purchasing should
include an outright purchase quote as well as lease options. Equipment
costing less than $50,000 may not be purchased under a capital lease arrangement
without prior approval of the treasurer or chief financial officer (or
Review Process. The purchasing department will route
all installment and capital lease contracts through the university's contract
review process. These contracts should include amortization schedules
and the rate of interest (implicit or stated). Purchase orders can be
issued after the contracts are approved for the current year's obligation
of university funds.
Treasurer's Office. For approved installment or capital lease contracts,
the Treasurer's Office will prepare journal vouchers scheduling the installments
or leaseholds payable and capitalizing the purchased equipment. Each year
end, the installments/leaseholds payable are reduced by the amount of the
principal paid during the year under the installment purchase or capital lease
contracts. This amount is determined by obtaining an expenditure summary for
general ledger (G/L) code 461800 and can be verified from the amortization
schedules on file. Only principal payments for these types of contracts should
use G/L 461800.
Equipment Costing Less Than $50,000. Departments wishing
to purchase equipment costing less than $50,000 under a capital lease
agreement should check with campus/unit fiscal officers to determine if
the equipment can be financed internally to avoid incurring interest charges
to third parties.
Invoice Processing. After equipment is purchased under
a capital lease agreement, acquiring departments (using amortization schedules
from the Treasurer's Office - see Appendix A)
will submit an approved invoice for each installment or lease payment
due. The invoice must show both principal and interest portions of each
payment, using general ledger codes 416800 (for the principal) and 442200
(for the interest).
Departmental Accounting Entries. The following is an example of departmental accounting entries for the purchase of an IBM 3031 computer with monthly payments of $12,615.59 for five years and an implicit interest rate of 8.85 percent:
Installment Purchase Plan. If the computer is purchased
under the installment purchase plan, the value of 60 monthly payments
of $12,615.59 would be $609,872.00. The journal voucher prepared by Treasurer's
Office to record the purchase would appear as follows:
General Ledger Code
First Installment. When the first installment is due,
the department prepares the invoice as follows:
General Ledger Code
Equipment Installment -
Equipment Installment -
(Note: The A01020001 credit is automatically performed.)
Year-end Adjustment. At the end of the fiscal year,
an adjustment in the installments/leaseholds payable account is necessary
to record the principal reduction during the fiscal year. The journal
voucher prepared by the Treasurer's Office would appear as follows: