FASB ASC 842 requires Cornell to determine whether a contract contains a lease before deciding on the appropriate accounting treatment. If the agreement contains a lease, it must be classified as either an operating or a finance lease and the appropriate object code must be used for transactions related to the lease.
Jump to sections: Procedures | Does the contract contain a lease? | Is the lease an operating or a finance lease? | Lease Accounting
Procedures
Determine whether your contract contains a lease. Go to the Does the contract contain a lease? decision wizard to get started.
If the contract does not contain a lease:
- Complete the Lease Determination Form (PDF, 59 KB) and send it to Accounting along with a copy of your decision wizard result. Use a non-lease object expense code such as 6255.
If the contract contains a lease:
- Determine whether it’s an operating or a finance lease. Go to the Is this an operating or a finance lease? decision wizard to get started.
- Determine which object code to use for the expense. See Object Code Descriptions below.
- Complete the Lease Determination Form (PDF, 59 KB) and send it to Accounting along with a copy of both of your decision wizard results.
- Record periodic payments to the vendor using the correct object code. See Lease Accounting below.
- Verify that the account being charged for the lease payment maps to the same PLCAPT account in which the lease liability was recorded. See Lease Accounting below.
- Notify Accounting if the lease changes and when the lease is renewed or terminated.
Accounting is responsible for reviewing each completed Lease Determination Form to ensure compliance with FASB guidance. For any new finance or operating leases, Accounting will calculate the initial assets and liabilities, as well as create related amortization tables. In the instance of a new finance lease, Accounting will notify Capital Assets to create a new inventory record for the asset in the Capital Asset Management (CAM) system.
Complex contracts should be reviewed in conjunction with the full accounting standard, as described below. If you need help evaluating the terms of the lease or the criteria listed below, please contact Accounting.
Real Estate Leases: Unit personnel, including deans and directors, should not sign real estate leases. For all real estate leases, contact the Real Estate Department, which will coordinate with University Counsel and Risk Management & Insurance, obtain necessary signatures, and return the documents to the unit.
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The following information summarizes the FASB guidance and assumes standard lease terms, where Cornell (lessee) is leasing an asset from a third party (lessor).
Does the contract contain a lease?
Definitions:
- Lease: Present when a contract, or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
- Short-term lease: These are leases less than 12 months. These leases should not be booked to any of the object codes listed below.
To determine whether a contract conveys the right to control the use of an identified asset for a period of time, you must assess both of the following:
- Which party has the right to obtain substantially all of the economic benefits from use of the identified asset.
- Which party has the right to direct the use of the identified asset.
The following flowchart image depicts the determination process and is the basis for the Does the contract contain a lease? decision wizard.
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Is the lease an operating or a finance lease?
Definitions:
- Operating lease: This applies to any lease that does not meet the criteria of a finance lease.
- Finance lease: Previously called a capital lease under old accounting guidance, these are leases that meet specific criteria, as described below.
The following information explains the operating vs finance lease determination process and is the basis for the Is this an operating or a finance lease? decision wizard.
If any one of these five criteria are met, at its inception, the lease should be considered a finance lease:
- Transfer of ownership.
The lease transfers ownership of the property to Cornell by the end of the lease term. This criterion is met in situations where the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title.
- Lease purchase option.
The lease grants Cornell the option to purchase the underlying asset and it’s reasonably certain that Cornell will opt to do so. “Reasonably certain” is a high threshold of probability where Cornell has a compelling economic reason to exercise the option.
- Lease term.
The lease term is equal to 75% or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion will not be used for purposes of classifying the lease.
The “estimated economic life” is defined as the estimated remaining period during which the property is expected to be economically usable by one or more users, with normal repairs and maintenance, for the purpose for which it was intended at lease inception, without limitation by the lease term.
Cornell typically equates the estimated economic life to the useful life used for depreciation.
- Present value.
The present value of the sum of the minimum lease payments and any residual value guaranteed by Cornell that is not already reflected in the lease payments, equals or exceeds substantially all of the fair value of the underlying asset. Cornell defines “substantially all of the fair value of the underlying asset” as 90% or more. The fair value of the underlying asset is reduced by any related investment tax credit retained and expected to be realized by the lessor.
You can calculate the present value of the lease payments using the rate implicit in the lease, or an approximation of the university’s incremental borrowing rate, which you can obtain by contacting Accounting.
- Alternative use.
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. In assessing, the effect of contractual restrictions and practical limitations on the lessor’s ability to readily direct the underlying asset for another use should be considered. Any contractual restrictions should be substantive (i.e., enforceable) for the asset not to have an alternative use to the lessor. “Practical limitations” exist if the lessor would incur significant economic losses to direct the underlying asset for another use. Examples of practical limitations are assets that have unique design specifications or that are in remote areas.
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Lease Accounting
For Operating Leases
Accounting entries must record a right-of-use (ROU) asset, with a credit to a lease liability, at an amount equal to the present value at the beginning of the lease term, of minimum lease payments required during the lease term.
For Finance Leases
Accounting entries must record a capital asset, with a credit to a lease liability, at an amount equal to the present value at the beginning of the lease term, of minimum lease payments required during the lease term. Depreciation is recorded in accordance with university guidelines. See University Policy 3.9, Capital Assets.
Payments are allocated between reduction of liability and interest expense using the rate implicit in the lease.
Object Code Descriptions
- 3730 (Finance Lease Equipment): Used when acquiring or recording equipment that meets the definition of a finance lease. Will generate capitalization entries on asset object code. Will result in a capital asset record in CAM.
- 3735 (Finance Lease Real Estate): Used when acquiring or recording real estate that meets the definition of a finance lease. Will generate capitalization entries on asset object code. Will result in a capital asset record in CAM.
- 3740 (Finance Lease Computers): Used when acquiring or recording computers that meets the definition of a finance lease. Will generate capitalization entries on asset object code. Will result in a capital asset record in CAM.
- 3745 (Finance Lease Vehicles): Used when acquiring or recording vehicles that meets the definition of a finance lease. Will generate capitalization entries on asset object code. Will result in a capital asset record in CAM.
- 6210 (Operating Lease Computers): Lease expenditures for computers, audio/visual and peripheral equipment, which meet the definition of an operating lease and have a signed lease term of one year or greater.
- 6215 (Operating Lease Copiers/Printers): Lease expenditures for copiers and multi-function printers which meet the definition of an operating lease and have a signed lease term of one year or greater.
- 6220 (Operating Lease Equipment): Lease expenditures for equipment which meet the definition of an operating lease and has a signed lease term of one year or greater.
- 6230 (Operating Lease Real Property): Lease expenditures for real property which meet the definition of an operating lease and has a signed lease term of one year or greater.
- 6240 (Operating Lease Vehicle): Lease expenditures for vehicles which meet the definition of an operating lease and has a signed lease term of one year or greater.
Accounting Entries
Operating Lease
If the lease is an operating lease, there will be an initial accounting entry to recognize a right-of-use (ROU) asset and operating lease liability.
Initial measurement (done by Accounting):
DR ROU asset operating lease (object code 1930)
CR operatign lease liability (2270)
Subsequent measurement (with each lease payment):
DR lease expense (62XX) (see object code chart below)
DR operating lease liability (2270)
CR cash (1000)
CR ROU asset accumulated depreciation (1931)
Accounting will record the debit to reduce the liability and the credit to the ROU asset accumulated depreciation account. The unit must ensure that the expense is processed under the correct object code, in accordance with the terms of the agreement:
| Chart Code |
Object Code |
Object Code Name |
| IT |
6210 |
Lease - Computers |
| IT |
6215 |
Lease - Copiers & Multi-Function Printers |
| IT |
6220 |
Lease - Equipment |
| IT |
6230 |
Lease - Real Property |
| IT |
6240 |
Lease - Vehicle |
Finance Lease
If the lease is a finance lease, special initial and ongoing accounting transactions are required, because finance lease transactions are an alternate financing arrangement for the procurement of an asset.
Initial Measurement: (This entry is done by plant accounting and capital asset accounting)
DR capital asset (at present value (object code 18xx))
CR finance lease liability (at present value (object code 226x))
Subsequent Measurement (for each lease payment*): The unit must ensure that each payment posts to the appropriate 37XX object code. The full payment amount will reduce the liability balance.
| Chart Code |
Object Code |
Object Code Name |
| IT |
3730 |
Finance Lease - Equipment |
| IT |
3735 |
Finance Lease - Real Estate |
| IT |
3740 |
Finance Lease - Computers |
| IT |
3745 |
Finance Lease - Vehicles |
*The payment must be charged to an account that maps to the same PLCAPT account where the liability is recorded, so that the system will relieve the lease liability properly.
Payments trigger a system-generated entry:
DR finance lease liability (226x)
CR net investment in plant (3160)
DFS will periodically adjust for the interest component (using a high-level financial statement account that is not reflected on unit accounts) based on the amortization schedule for the asset.
DR interest expense (6926 Finance Lease Interest)
CR finance lease (37xx)
Which will trigger a system-generated correcting entry:
DR net investment in plant (3160)
CR finance lease liability (226x)
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