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.
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:
If the contract contains a lease:
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.
The following information summarizes the FASB guidance and assumes standard lease terms, where Cornell (lessee) is leasing an asset from a third party (lessor).
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:
The following flowchart image depicts the determination process and is the basis for the Does the contract contain a lease? decision wizard.
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:
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.
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.
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|
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)
DFA 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)