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Chap4-10

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Chap4-10

    The California State University

    GAAP Reporting Manual

    Effective June 2009

    SECTION 4-10

    CAPITALIZED LEASES

    OBJECTIVE OF GAAP ADJUSTMENTS

    ; To record capital lease obligations and lease receivables and their related activity in

    conformity with GAAP.

GAAP ACCOUNTING TREATMENT

    CAPITALIZED LEASE OBLIGATIONS

    For legal basis accounting, the CSU generally treats lease obligations as operating leases. Accordingly, payments under these leases are recorded as expenses as lease payments are made. For GAAP reporting purposes, a capital lease obligation liability for future lease payments should be established if, at its inception, the lease agreement meets one or

    more of the following criteria (per FAS 13):

    1. By the end of the lease term, ownership of the leased property will be transferred to

    the campus at no additional cost;

    2. The lease agreement contains a bargain purchase option (e.g., the asset may be

    purchased for $1 at the end of the lease term);

    3. The lease term is equal to 75% or more of the estimated useful life of the leased

    property (e.g., a copier that would typically have a five year life is being leased four

    or more years); or

    4. At the inception of the lease, the present value of the minimum lease payments totals

    90% or more of the fair value of the leased property (e.g., the equipment costs

    $100,000 and the present value of minimum lease payment computation yields a

    present value of at least $90,000).

    A lease that meets one or more of the above criteria is considered to be a purchase of the leased asset, and the asset should be capitalized, usually for a cost equal to the present value of the total amount of the future minimum lease payments on the lease. The offset to the cost of the asset is to be recorded as a liability to capital lease obligations. If the lease agreement meets criteria 1 or 2 above, the leased asset should be depreciated in accordance with the campus’ normal capitalization policy and estimated useful life for that asset category; however if the lease agreement meets criteria 3 or 4 above, the asset should be depreciated over the term of the lease. The capital lease obligation liability is to be amortized over the term of the lease. The asset cost is to be recorded in the campus’ legal basis accounting records, while the capital lease obligation liability is typically recorded and amortized via GAAP adjustments.

    Last revised April 28, 2009 4.10-1

    The California State University

    GAAP Reporting Manual

    Effective June 2009

    Leases that do not meet any of the above criteria are already properly recorded by the campus as operating leases, and no adjustments are necessary for the GAAP basis financial statements.

CALCULATION OF PRESENT VALUE OF MINIMUM LEASE PAYMENTS

    The following information is necessary for the campus to calculate the present value of minimum lease payments:

    1. Fair value of asset being leased

    2. Term of lease

    3. Required periodic payments

    4. Lessor’s explicit interest rate or the campus’ incremental borrowing rate.

    After the determination has been made that a lease qualifies for capitalization, most campuses might find it easier to record the obligation and the related asset at the quoted price of the asset, if not materially different than the computed amount. This will facilitate the adjustments that need to be made as illustrated in the examples below. However, an amortization schedule will need to be prepared to differentiate between the principal and interest portions of the monthly payments.

ENTRIES REQUIRED

    A review and analysis of all leases and contracts should be performed each year to identify and record any new capital leases. Capital leases identified and recorded in the GAAP basis financial records in the prior year will rollforward the asset, liability, and net asset balances to the subsequent fiscal year. As a result, no GAAP adjustments are necessary to establish beginning balances.

    The adjustments related to the accrual of a new capital lease obligation liability and annual lease payments are reclassification adjustments. As the campus records the asset in its legal basis accounting records, adjustments are necessary to reclassify the offset made directly to Investment in General Fixed Assets, or if using Asset Management, the reduction of expense, to capital lease obligations on GAAP basis. Likewise as the campus records capital lease payments as operating expenses in its legal basis accounting records, adjustments are necessary to reclassify the principal portion as a reduction to the capital lease obligations balance and the interest portion as interest expense on a GAAP basis.

    EXAMPLE 1- The campus recorded $400,000 in capital lease obligations in the prior year GAAP basis financial records. The computation for new capital leases in the current year resulted in a liability for these new leases at their inception of $50,000. The campus had recorded the underlying capital assets in its legal basis records, at an original cost equal to the original amount of the capital lease obligations.

    Last revised April 28, 2009 4.10-2

    The California State University

    GAAP Reporting Manual

    Effective June 2009

Current Year Changes

    Invested in Capital Assets, Net of Related Debt (Fund 0997.501)

    Debit Net assets: Invested in capital assets, net of related debt,

     or Transfer to/from other funds (Asset Management ) $50,000

     Credit Capitalized lease obligations $50,000

    (To properly accrue for capital leases on a GAAP basis)

Unrestricted (from Asset Management)

    Debit Operating expenses by functional and natural classification $50,000

     Credit Transfer to/from other funds $50,000

    (To properly reclassify expense reduction from Asset Management for capital leases on a GAAP basis)

    EXAMPLE 2- The campus made payments for leases that have been determined to be capital leases totaling $60,000. Of this amount, $40,000 represented principal and $20,000 represented interest. The payments were made from Unrestricted net assets. Unrestricted

    Debit Interest Expense $20,000

    Debit Transfers to/from other funds $40,000

    Credit Operating expenses by functional and natural classification $60,000 (To properly reclassify capital lease payments made on a legal basis during the year)

Invested in Capital Assets, Net of Related Debt (Fund 0997.501)

    Debit Capitalized lease obligation $40,000

    Credit Transfers to/from other funds $40,000

    (To properly reclassify the principal portion of capital lease payments made during the year on a GAAP basis)

ENERGY LEASE OBLIGATIONS

    See discussion of energy lease obligations passed down from the Chancellor’s Office in Chapter 5, Section 5-4.

Last revised April 28, 2009 4.10-3

    The California State University

    GAAP Reporting Manual

    Effective June 2009

ENERGY CONVERSATION FINANCING THROUGH NON-CSU FINANCIAL INSTITUTION

    Energy conservation financing through other financing institutions (i.e. Koch) should be reported as a long term debt. Moreover, the proceeds related to the lease should be reported as other long term investments (restricted net assets).

FINANCING OF AUXILIARY ORGANIZATIONS PROJECTS

CAPITAL LEASE TRANSACTIONS WITH AN AUXILIARY ORGANIZATION

    The Revenue Bond Act of 1947 provides the CSU board of trustees with the ability to issue revenue bonds to fund specific programs, including the auxiliary organization facilities. The SRB program is a vehicle for financing these campus/auxiliary projects. AD 06-06 specifically addresses the SRB program for auxiliary organization debt refinancing or construction financing.

If you are a participating campus, please refer to the memorandum at:

    http://www.calstate.edu/sfo/CodedMemos/coded_memos_2006/AD06-06.pdf

    In summary, during the construction phase of the project, the campus carries the asset as construction work in process (CWIP) and debt on its accounting records, unless Emerging Issues Task Force No. 97-10 applies (please refer to AD 06-06 for further discussion). Upon execution of the lease agreement, the auxiliary would record the capital asset on its accounting records and the related capitalized lease obligation. At that time, the campus would remove the completed CWIP or asset from its accounting records and record a lease receivable due from the auxiliary organization.

    Effective January 1, 2008, SB 855 authorizes the CSU to loan or advance proceeds from its revenue bonds or revenue bond anticipation notes to third parties (e.g. auxiliary organizations) through a loan agreement for projects approved by the Board of Trustees. The CSU no longer issues a ground and facility lease agreement with the auxiliary organizations, but rather enters into a loan agreement with the participating auxiliary organization for financing debt under the revenue bond or revenue bond anticipation notes program.

    EXAMPLE 1 - For auxiliary organizations projects prior to the SB 855 effective date 1/1/08 when the Emerging Issues Task Force No. 97-10 still applies, campus usually has established a lease agreement with its auxiliary organization. Campus should record the following entries:

Last revised April 28, 2009 4.10-4

    The California State University

    GAAP Reporting Manual

    Effective June 2009

Campus

    Debit CWIP

    Credit Long-term debt obligations

    (To properly record auxiliary asset during construction phase of project)

Debit Leases receivable

    Credit Capital assets, net (CWIP, or other capital asset category depending on

    whether the completed project was transferred or not)

    (To properly remove the completed asset upon execution of the lease agreement)

Auxiliary Organization

    Debit Capital assets, net

    Credit Capitalized lease obligations

    (To properly record the completed asset and related debt upon execution of the lease agreement

    EXAMPLE 2 - For auxiliary organizations projects after the SB 855 effective date 1/1/08, SB 855 applies. Campus is acted as an agency only and manages the construction for the auxiliary organization. There is no agreement signed between the campus and the auxiliary organization. The loan (note) agreement is actually signed between the auxiliary organization and the Trustee directly.

Campus

    Debit Other long term investment

    Credit Other liabilities, noncurrent (to auxiliary organization) (To properly record SRB bond proceeds and liability to the auxiliary organization)

Debit Expenses / CWIP

    Credit Other long term investment

    (To properly record construction costs)

Last revised April 28, 2009 4.10-5

    The California State University

    GAAP Reporting Manual

    Effective June 2009

Debit Other liabilities, noncurrent

    Credit Expenses / Capital assets, net (CWIP, or other capital asset category

    depending on whether the completed project was transferred or not) (To properly transfer the construction expenses or completed asset to the auxiliary

    organization)

Auxiliary Organization

    Debit Receivables, noncurrent (from campus)

    Credit LT-debt obligations

    (To properly record receivables from campus and SRB bond obligation) Debit Capital assets, net (CWIP, or other capital asset category depending on whether

    the completed project was transferred or not)

    Credit Receivables, noncurrent (from campus)

    (To properly record the transfer of completed asset from campus)

    The above examples are simplified in the GAAP manual. Actual transactions are more complicated and required more thoughtful communications between the campus, the auxiliary organization and the Chancellor’s Office. If the campus is a party to such a

    transaction, the campus should contact the auxiliary organization as soon as possible to verify that both parties are properly recording the transaction. Additionally, the campus and the auxiliary organization must also consult with the Chancellor’s Office, the

    independent auditors of the auxiliary organization, and the independent auditors of the campus in order to determine 1) the proper accounting treatment for the transaction and 2) consistency in accounting treatment within the CSU as a whole.

    Note that in certain situations, the total construction costs of the asset may ultimately be more or less than the SRB issuance amount. In these situations, the campus and the related auxiliary organization would need to come to agreement on how to handle the resulting “excess” or “shortfall” and consider this aspect in determining the proper accounting treatment

    In addition to construction, the auxiliary organization is able to participate in the refunding of its senior bonds through the Systemwide Revenue Bonds, also discussed in AD 06-06.

Last revised April 28, 2009 4.10-6

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