Lease Accounting

Effective for reporting periods beginning July 1, 2021, the university reports lease activity in the university's financial statements and footnotes in accordance with Governmental Accounting Standards Board (GASB) Statement 87. GASB 87 is based on the principle that leases are financings of the right to use an underlying asset and established three types of leases.

Three Lease Types

  • Short-term - maximum possible term of 12 months or less including options to extend regardless of probability of extending, includes month-to-month agreements
  • Contracts that transfer ownership - if ownership transfers to the lessee, contract should be recorded as a financed sale/purchase
  • All others - Any agreement that doesn't qualify as a short-term lease or ownership transfer

Lessee Accounting

Lessees record lease liabilities and lease assets upon right to possession of leased asset. The lease liability is measured as the present value of the lease payments over the lease term. The lease asset is measured as the lease liability plus payments made to lessor at or before the commencement date. Lease payments made result in reduction of the liability and recognition of interest expense. Lease asset will be amortized over the shorter of the lease or useful life of underlying asset.

Lessor Accounting

Lessors record lease receivables and deferred inflows of resources. The lease receivable is measured as the present value of lease payments expected over the lease term. The deferred inflow of resources is measured at the initial measurement of the lease receivable plus any payments received before commencement date, less any incentives paid. Lease payments received result in reduction of receivable and recognition of interest revenue. Deferred inflow is recognized as revenue in a systematic and rational manner over the life of the lease.

Definitions

Lease

A lease is a contract that conveys control of the right to use another entity's asset. Leases have the following conditions:

  1. A specific asset is identified, implicitly or explicitly
  2. Control of the identified asset is transferred to the lessee. Control is transferred when: lessee has ability to direct use of the asset, and lessee derives most of the benefits from the use of the identified asset
  3. The contract is for a specified period of time
  4. There is 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:

  • 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
  • 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
  • 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
  • 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
  • Periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party (or if both parties have to agree to extend) are cancelable periods and are excluded from the lease term

Resources

Department Responsibilities

  • Report lease contracts to Business Affairs within 30 days of contract execution
  • Mark the appropriate GASB 87 box in PCS portal
  • Evaluate likelihood of available extensions and early terminations
  • Notify Business Affairs of amendments or other lease changes
  • Record monthly/quarterly/annual payments per account code guidance from Business Affairs

Business Affairs Responsibilities

  • Determine appropriate accounting for lease
  • Communicate proper account code for payments to department
  • Add leases to lease software and update as needed
  • Calculate and record liabilities/assets or receivables/deferred inflows
  • Reconcile lease accounting/activity
  • Record monthly entries to adjust/amortize leases
  • Prepare financial statement footnotes and other reports as needed
  • Review leases marked as GASB 87 in PCS Portal

Account Codes to Use - Lessee (UO as Tenant)

  • Rentals - Payments for rentals that are short-term in nature and do not have recurring payments. Examples include one day room rentals.
    • 24101 - Non-IT Equipment Rentals
    • 24102 - IT Equipment Rentals
    • 24150 - Land Rentals
    • 24151 - Building Rentals
    • 24199 - Miscellaneous Rentals
  • Leases - Payments for leases that are longer and typically have recurring payments, but do not qualify as a lease under GASB 87. Examples include a six month long classroom rental and a lease that perpetually renews.
    • 24201 -Non-IT Equipment Leases
    • 24202 - IT Equipment Leases
    • 24203 - Software Subscriptions/Licenses
    • 24250 - Land Leases
    • 24251 - Building Leases
    • 24299 - Miscellaneous Leases
  • Leases - Payments for leases that meet the definition of a lease under GASB 87.
    • 24401 - Lease Asset Expense Equipment
    • 24402 - Lease Asset Expense IT Equipment
    • 24405 - Lease Asset Expense Building
    • 24406 - Lease Asset Expense Land

Account Codes to Use - Lessor (UO as Landlord)

  • Rentals - Income from rentals that are short-term in nature and do not have recurring payments. Examples include one day room rentals.
    • 06723 - Rental Income/Facilities Use
    • 09313 - Internal Sales (for rentals to other UO departments only)
  • Leases - Income for leases that are longer and typically have recurring payments, but do not qualify as a lease under GASB 87. Examples include a 3 month long equipment rental and a lease that perpetually renews.
    • 06727 - Lease Income
  • Leases - Income payments for leases that meet the definition of a lease under GASB 87.
    • 06728 - Lease Receivable Income

Excluded from GASB 87

  • Leases of intangible assets.
  • Leases of biological assets.
  • Leases of inventory.
  • Contracts that meet the definition of a service concession arrangement. See paragraph 4 of GASB Statement 60, Accounting and Financial Reporting for Service Concession Arrangements.
  • Leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
  • Supply contracts, such as power purchase agreements.
  • Non-exchange contracts.