ACCOUNTING FOR PROPERTY ACQUISITIONS - LEASES AND CONTRACTS THAT TRANSFER OWNERSHIP (FINANCED PURCHASE) - 8632
Governmental Accounting Standard Board (GASB) Statement No. 87 establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Prior to GASB No. 87, leases were classified as capital leases or operating leases. GASB No. 87 classifies these financings as short-term leases, leases, or contracts that transfer ownership (financed purchase). See the State Controller’s Office’s reporting website for detailed information on reporting leases and financed purchases.
Short-Term Lease
A short-term lease is a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Because the term is 12 months or less and there is no transfer of ownership, no capital asset is recognized and the lease payments are expensed in the period incurred.
Lease
A lease is 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. A lease has a minimum noncancelable contract term greater than 12 months. The asset in a lease contract is the right-to-use lease asset, not the underlying asset. See SAM Section 8615.4, Intangible Assets – Right-To-Use Lease Asset for information about the measurement and recognition of the right-to-use lease asset.
Contracts That Transfer Ownership (Financed Purchase)
A financed purchase is a contract that transfers ownership of the underlying asset to the purchaser by the end of the contract and does not contain termination options. The contract may contain a fiscal funding or cancellation clause that is not reasonably certain of being exercised. The mere inclusion of a bargain purchase option does not qualify as a transfer of ownership. Account for a financed purchase as if an asset was purchased at the inception of the lease. Compute depreciation/amortization over the estimated useful life of the asset. See SAM Chapter 8600 for additional information on property accounting.