Lease – GASB Statement 87 defines a lease as a contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

Lease Term – The period during which a lessee has a noncancelable right to use an underlying asset, plus the following periods, if applicable:

1. Periods covered by a lessee's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessee will exercise that option.
2. Periods covered by a lessee's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessee will not exercise that option.
3. Periods covered by a lessor's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessor will exercise that option.
4. Periods covered by a lessor's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessor will not exercise that option.
   

Guaranteed Residual Value - A guaranteed amount that the lessee assures the lessor will recover at the end of the lease term. Lessors often insert guaranteed residual value clauses to minimize risk. A guaranteed residual value and bargain purchase option are mutually exclusive; only one of the two can be in the same lease agreement (or neither will be in the lease agreement).

Future Minimum Lease Payments - The payments the lessee is obligated to make, or can be required to make. This amount includes the bargain purchase price or a guaranteed residual value, if applicable.

Executory Costs – Asset “ownership-type costs" such as insurance, taxes, or maintenance expense. If a portion of a lease payment represents executory costs, then this portion of the payment should be excluded when figuring the present value of lease payments.

Present Value – Current worth of future sums of money. For help calculating this, see the Resources below or contact the State Controller's Office, Bureau of Reporting and Review.

Fair Market Value – amount that could be received on the sale of an asset when willing and financially capable buyers and sellers exist and there are no unusual circumstances such as liquidation, shortages, and emergencies.

Policy

Lessee Accounting

All contracts that meet the following criteria shall be reported as a lease. The asset and corresponding liability will be reflected in the financial statements of the State. 

1. Contract conveys control of the right to use another entity's nonfinancial asset (land, buildings, vehicles, equipment)
2. For a period of time (one year or greater)
3. In an exchange or exchange-like transaction (a lease would not be considered an exchange-like transaction if the market value of the leased asset is significantly more than the amount paid (i.e. lessee pays $1))
4. Have a present value of $100,000 or more over the term of the lease, including any options to renew.

 Lessor Accounting

In order to properly account for and disclose leasing activities in the statewide financial statements, agency leases, where the agency is acting as a lessor, shall stipulate that the lessee must annually report all expenses incurred in any leasing agreement. Records shall be maintained for each state-owned asset leased to another party.

All contracts that meet the following criteria shall be reported as a lease. The asset will be reflected in the financial statements of the State and remain on the books.

1. Contract conveys control of the right to use another entity's nonfinancial asset (land, buildings, vehicles, equipment)
2. For a period of time (one year or greater)
3. In an exchange or exchange-like transaction (a lease would not be considered an exchange-like transaction if the market value of the leased asset is significantly more than the amount paid i.e. lessee pays $1)
4. Have a present value of $200,000 or more over the term of the lease including any options to renew. 

Leases do not include contracts that transfer ownership at the end of the contract or short-term leases. Contracts transferring ownership of the underlying asset are accounted for as a financed purchase by the lessee. The lessee should expense short-term lease payments and the lessor should recognize revenue from the short-term lease payments.

Administrative Procedures

GASB Statement 87 requires the following reporting of leases greater than 12 months (including all possible options to extend):

Lessee Accounting

• As an asset, the lessee will record the value of the lease liability plus any prepayments and initial direct costs that are ancillary to place the asset in use.
• As a liability, the lessee will record the present value of any future lease payments, which includes
• Fixed payments
• Variable payments that are fixed in substance
• Variable payments based on an index or rate, and any reasonably certain residual guarantees
• Amounts that are reasonably certain of being required to be paid by the lessee under residual value guarantees
• The exercise price of a purchase option if it is reasonably certain that the lessee will exercise that option
• Payments for penalties for terminating the lease, if the lease term reflects the lessee exercising (1) an option to terminate the lease or (2) a fiscal funding or cancellation clause
• Any lease incentives that reduce the amount a lessee is required to pay for a lease
• Any other payments that are reasonably certain of being required based on an assessment of all relevant factors.

The principal portion of the payment will reduce the lease liability and the interest portion will be recorded as an expense to the STARS interest expense subobject [TL1] 5962. Agencies will need to use capital outlay for leases that are greater than a year and over the $100,000 threshold.

Identifying Interest Rate: The future lease payments should be discounted using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease. If the interest rate cannot be readily determined by the lessee, the lessee's estimated incremental borrowing rate (an estimate of the interest rate that would be charged for borrowing the lease payment amounts during the lease term) should be used. The Board determined the preferable rate to use is the rate the lessor charges the lessee, which may be the implicit rate, because the transaction is made at that rate.  ​

Analysis and Conclusion

We will use the interest rate identified in each lease agreement. If an interest rate is not explicitly stated in a lease contract, we will:

1. Calculate the implicit interest rate of the fair market value of the leased asset if reasonably obtainable or
2. Use the US Treasury yield rate plus 1% spread as the incremental borrowing rate. Use the rate in effect when the lease was entered into. A good resource for historical yield rates is the Treasury.gov website. The STO, Finance, and SCO agreed this would be a good estimate to use the US Treasury yield rate because of our good credit rating.

Subobjects for rentals, short term leases (12 months or less included all options to extend regardless of intent), and leases less than $100,000 per lease that do not meet GASB 87 requirements include:

• 5900 Rentals, short-term leases, and leases less than $100,000 per lease
• 5905 – Computer hardware rent/lease
• 5906 – Computer software rent/lease
• 5910 – Machinery & equipment rent/lease
• 5915 – Office equipment rent/lease
• 5920 – Vehicles rent/lease
• 5921 – Airplanes rent/lease
• 5925 – Office space rent/lease
• 5930 – Retail store rent/lease
  
• 5935 – Storage space rent/lease
• 5938 – Meeting/conference rooms rent/lease
• 5938 – Trade show booths & furnishings
• 5940 – Other rent & short term leases
  

Subobjects for leases greater than one year and $100,000 per lease that meet GASB 87 requirements include:

• 6900 Leases greater than one year and $100,000 or more per lease
• 6905 – Computer leases
• 6910 – Machinery & Equipment leases
• 6915 – Office Equipment leases
• 6920 – Vehicle leases
• 6930 – Land leases
• 6940 – Building leases
• 6950 – Improvements Other than Building leases
• 6960 – Other leases
  

The agency shall record the value of the leased asset at the present value of future minimum lease payments. The agency shall record this either on their own fixed asset system or on the SCO's FAS (Fixed Asset System) using the ownership code of (L).

If the lease involves multiple underlying assets, lessees and lessors in certain cases should account for each underlying asset as a separate lease contract. To allocate the contract price to individual components, use contract prices for each component as long as they do not appear to be unreasonable based on professional judgment, or use professional judgement to determine a best estimate if there are no stated prices or if the stated prices appear unreasonable. If determining a best estimate is not practicable, multiple components in a lease contract should be accounted for as a single lease unit. If, at the end of the lease, the agency obtains ownership of the asset, through a bargain purchase option, they should contact the SCO Division of Statewide Accounting (via servicedesk@sco.idaho.gov) or book value and instructions on updating the asset in FAS from a lease to a capital asset.

For statewide reporting purposes, agencies are required to report lease information to the State Controller, as requested in the Lease GAAP closing package.

Lessor Accounting

• The lessor will record the lease receivable, as well as continuing to record the leased asset as such. 
• As a deferred inflow, the lessor will record a lease receivable in addition to any cash that is received up front that relates to a future period. Measurement of the lease receivable should include the following, if required by the lease:
• Fixed payments
• Variable payments that are fixed in substance
• Variable payments based on an index or rate, and any reasonably certain residual guarantees
• Residual value guarantee payments that are fixed in substance
• Any lease incentives payable to the lessee.
  

Subobjects for rentals, short term leases (12 months or less included all options to extend   regardless of intent), and leases less than $200,000 per lease that do not meet GASB 87 requirements include:

• 2700 Rentals, short-term leases, and leases less than $200,000 per lease
• 2715 – Rent income
• 2725 – All other rentals
• 2730 – Agric/grazing leases
• 2732 – Mineral leases
• 2735 – Concession leases
• 2739 – All other leases
  

Subobjects for leases greater than one year and $200,000 per lease that meet GASB 87 requirements include:

• 2750 Leases greater than one year and $200,000 or more per lease
• 2751 – Land leases revenue
• 2753 – Building leases revenue
• 2755 – Machinery, Equipment, Other leases revenue
  

All records shall be retained for audi​t purposes.

Agencies shall disclose leasing activities and provide revenue information when completing the annual Leases Receivable Closing Package for the State Controller's Office.

Resources

Click here for a detailed example of a capital lease.

The State Controller's Office has created an MS Excel template for you to help calculate present value. Click here to open the Excel template. You can then save the template on your computer.​