006.09.1 R1-19-11-238. Leases of Tangible Personal Property (Equipment)
AR ADC 006.09.1 R1-19-11-238Arkansas Administrative Code
Ark. Admin. Code 006.09.1 R1-19-11-238
006.09.1 R1-19-11-238. Leases of Tangible Personal Property (Equipment)
Provisions for leasing of equipment by State agencies are contained in ACA § 19-11-238. Agencies should review lease contracts before signing and ensure that they are not committing their agencies to make lease payments beyond the end of a biennial period. The contract should include language to allow termination of the lease in the event sufficient appropriations or funding does not exist to fulfill the obligation. Contractual questions concerning leasing equipment should be directed to the Department of Finance and Administration-Office of State Procurement. Accounting questions should be directed to the Department of Finance and Administration-Office of Accounting.
PLEASE NOTE: ACA § 22-8-102 covers leasing and renting of State vehicles by State agencies. Procedures governing the lease of motor vehicles are located on the DFA-OSP web site at http://www.arkansas.gov/dfa/procurement/pro_index.html.
Lease Type Determination
A lease agreement that meets one or more of the following four criteria is a capital lease:
• The lease transfers ownership of the property to the lessee by the end of the lease term.
• The lease contains a bargain purchase option. A bargain purchase option exists when the lessee can either buy the property at a minimal amount or renew the lease at very low rental payments relative to market rates.
• The lease term is equal to 75% or more of the life of the leased asset. (For example, the lease term is six years and the estimated remaining useful life is eight years). The life of a used leased asset will be calculated using 75% of the suggested useful life in the State's capital assets policy.
• The present value of rental and other minimum lease payments equals or exceeds 90% of the fair value amount of the leased asset (for example, the present value of the rental and other minimum lease payments equals $9,000, and the fair value is $10,000). Instructions on how to calculate the present value of minimum lease payments follow the example below. The fair value is the amount at which the asset could have been purchased.
The last two criteria are not applicable when the beginning of the lease term falls within the last 25% of the total estimated remaining useful life of the leased property.
The lease is accounted for as an operating lease if it does not meet the State's capitalization threshold or does not meet the criteria of a capital lease.
Accounting for Leases
Accounting for an operating lease consists of recording rental payments as a normal operating expenditure/expense on a monthly basis. Each agency will be required to provide the amount of operating lease payments for the year, as well as future operating lease payments annually for inclusion in the Comprehensive Annual Financial Report (CAFR).
Capital Leases are Accounted for as Follows:
An Outline Agreement is created in the Arkansas Administrative Statewide Information System (AASIS) at the inception of the lease. Office of State Procurement personnel create the Outline Agreement for leases of $25,000 or more, and agency procurement personnel create the Outline Agreement for leases less than $25,000. The material numbers for principal (10119371) and interest (10119370) must be used in the outline agreement.
The agency personnel responsible for asset management creates an asset master record in AASIS using transaction AS01, “Create Asset Master Record,” and selects the appropriate NBR (non-budget relevant) asset class. On the allocation tab, select the class code for Capital Lease 000000. This class code allows the State to collect capital lease information on a statewide level.
If the lease agreement transfers ownership of the asset to the lessee (criterion 1) or contains a bargain purchase option (criterion 2), the leased asset is depreciated over the recommended useful life of the class code the asset would have been assigned to if the asset had been purchased. If the lease does not transfer ownership or does not contain a bargain purchase option, then the asset is depreciated over the term of the lease.
To record the acquisition value of the asset, perform transaction ABSO, Miscellaneous Transactions. Enter the non-budget relevant asset class. The document date will be the capitalization date of the asset. The transaction type will be 100. Enter the quantity. Credit Other Financing Sources (6990004200). The text field can be used to record information about the lease. Use document type “aa.” The leased asset should not be booked at more than its fair-market value; therefore, use the lower of (1) the present value of the minimum lease payments (excluding executory costs) or (2) the fair market value of the leased asset at the inception of the lease. The asset should be booked in the fund code from which the lease payments will be made.
To record the liability, use transaction FB50, G/L Acct Pstg: Single Screen Trans. into Fund 7006101, which has been set up to carry all long-term liabilities for the State with each agency having its own cost center within the fund. Use document type “sa.” Debit Other Financing Sources (6990004200). Credit Non-Current Capital Leases (222005000).
Capital Lease Payments are Budgeted under Capital Outlay (Commitment Item 11)
For financial statement purposes, accounts 5120012100, CI11 Interest Expense Capital Lease, and 5120012200, CI11 Principal Expense Capital Lease, are used to record the capital lease payments. The lease payments are recorded as expenditures of the fund from which the lease payments are made. An amortization schedule must be prepared to distinguish the principal and interest portion of the lease payments.
User agencies must utilize the purchase order system for all lease payments. The purchase order can cover an entire year's worth of payments so as to reserve budget and enter the remaining year's payments faster. The year you enter the purchase order into the system is the year your budget will be encumbered.
A single lease may be for several pieces of equipment with the payments apportioned to more than one cost center. An amortization schedule showing the principal and interest portion applicable to each cost center may be required.
Purchase orders for capital lease payments should reference the outline agreement number, the “our reference” number and the “your reference” number. Use material numbers 10119371 and 10119370 to access the proper principal and interest expense accounts.
Year-End Reporting for the CAFR
As part of the year-end closing process, each agency will be required to provide the asset acquisition values and accumulated depreciation at year end as well as principal and interest amounts due in subsequent years for inclusion in the CAFR.
Year-end Closing Entries
Two closing entries must be made to properly classify capital lease payments for CAFR purposes.
The first entry is made in period “15” of Fund 7006101 in your agency's cost center to reclassify the principal portion of capital lease payments.
DR | CR | ||
2220005000 Non-current Capital Lease Payable | $ XX | ||
5120001200 Accrued Debt Service Principal | $ XX | ||
(To reclassify capital lease principal payments to reduce the liability)
The second entry is made in period “15” of Fund 7006101 in your agency's cost center to reclassify the current portion of the lease payable.
DR | CR | ||
2220005000 Non-current Capital Lease Payable | $ XX | ||
2114001000 Capital Lease Payable - Current | $ XX | ||
(To reclassify the current portion of the capital lease payable)
See Section R2-19-4-506 for further discussion of year-end closing procedures including year-end closing entries.
Definitions:
Executory Costs
Usually insurance, maintenance and taxes paid in connection with the leased property. If the lessor pays these “ownership-type costs,” a portion of each lease payment that represents executory costs should be excluded in computing the present value of the minimum lease payments because it does not represent payment on or reduction of the obligation. If the portion of the minimum lease payments that represents executory costs is not determinable from the provisions of the lease, an estimate of such amount must be made. Many lease agreements, however, specify that executory costs be paid to the appropriate third parties directly by the lessee; in these cases, the rental payment can be used without adjustment in the present value computation.
Lessee's Incremental Borrowing Rate
The rate of interest that the lessee would have had to pay at the inception of the lease to borrow the funds, or similar terms, to purchase the leased property. It is the policy of the State of Arkansas to use the prime rate for an agency's incremental borrowing rate.
Summarized Capital Lease Procedures
Capital Lease Determination
Apply the four capital lease criteria.
If any one of the four capital lease criterion is met, it is a capital lease; otherwise, it is an operating lease.
Recording the Capital Lease
Transaction AS01 - Creates asset master record.
Transaction ABSO - Record the asset in the fund from which the lease payments will be made Transaction FB50 ENTER GL ACCOUNT DOCUMENT - Record the liability in Fund 7006101 in your agency's cost center
Recording the Lease Payments
Create an amortization schedule to allocate principal and interest portions of each lease payment.
Create a purchase order.
PLEASE NOTE: The same purchase order can be used for a year's worth of lease payments.
Year-End Reporting
Provide asset acquisition values and accumulated depreciation at year end as well as principal and interest amounts due in subsequent years for inclusion in the CAFR.
Year-End Closing Entries
Reclassify principal expense as a reduction of the liability in Period “15” in Fund 7006101 in your agency's cost center.
Reclassify the current portion of the liability from the non-current portion in Period “15” in Fund 7006101 in your agency's cost center.
Current with amendments received through February 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 006.09.1 R1-19-11-238, AR ADC 006.09.1 R1-19-11-238
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