At times, it is necessary or preferable to lease assets (e.g., equipment, computers, vehicles, or real estate), rather than to purchase the assets outright. The first step in properly accounting for a lease is to determine whether the lease is an operating lease or a capital lease.
The information below is summarized from Financial Accounting Standards Board (FASB) guidance and assumes standard lease terms. Complex contracts should be reviewed in conjunction with the full accounting standard. If you need assistance with evaluating the terms of the lease or the criteria listed below, please contact us. FASB issued new accounting guidance (Accounting Standards Update 2016-02) on February 25, 2016, which will become effective in fiscal year 2020. These procedures will be updated at that time.
Note: For all real estate leases, the first point of contact should be the Real Estate Department. Real Estate will coordinate with University Counsel and Risk Management, obtain necessary signatures, and return the documents to the unit. Unit deans or directors should not sign real estate leases.
The following information applies when Cornell (lessee) is leasing an asset from a third party (lessor).
If any one of these four criteria is met, at its inception, the lease should be considered a capital lease:
The following applies when Cornell (lessee) is leasing an asset from a third party (lessor):
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, no special accounting is necessary.
Initial Measurement: none
Subsequent Measurement (each lease payment):
DR lease expense (62xx) (see object code chart below)
CR cash (1000)
Process lease payments in accordance with the terms of the agreement as lease expenses using the appropriate object code:
|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 capital lease, special initial and ongoing accounting transactions are required, because capital 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 capital lease liability (at present value (object code 226x))
Subsequent Measurement (for each lease payment*): The unit is responsible for ensuring 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||Capital Lease - Equipment|
|IT||3735||Capital Lease - Real Estate|
|IT||3740||Capital Lease - Computers|
|IT||3745||Capital Lease - Vehicles|
Payments trigger a system-generated entry:
DR capital lease liability (226x)
CR net investment in plant (3160)
DFA will periodically adjust for the interest component (using a high-level financial statement account) based on the amortization schedule for the asset.
DR interest expense (6926 Capital Lease Interest)
CR capital lease (37xx)
Which will trigger a system-generated correcting entry:
DR net investment in plant (3160)
CR capital lease liability (226x)
*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.
For all real estate leases, the first point of contact should be the Real Estate Department. Real Estate will coordinate with University Counsel and Risk Management, obtain necessary signatures, and return the documents to the unit. Unit deans or directors should not sign real estate leases.
Units entering a lease contract will do the following:
DFA, after receiving a Summary of Accounting Treatment from a unit, will do the following:
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