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FIN-6.07 - Leases

LEASES
Administrative Rule Adopted by Council
ARC-FIN-6.07

 
Purpose
The purpose of this administrative rule is to establish minimum standards for payment and reporting of leases.

 
Authority
Authority for this administrative rule is established in the City Charter and City Code. This administrative rule has been approved by the City Council.

 
Monitoring
The Accounting Division of the Bureau of Financial Services of the Office of Management and Finance (Accounting Division) will periodically monitor bureaus to assess compliance with the minimum standards of this rule. As instances of non-compliance are identified, bureaus will be required to develop and implement a corrective action plan. The Accounting Division will provide assistance to bureaus, if requested, to develop this plan. The Controller will report all instances of non-compliance annually to the Chief Financial Officer (CFO) and City Council.

 
Definitions
 
"Lease" means a contract granting the use of real estate, equipment, or other capital assets for a specified period of time in exchange for payment, usually in the form of rent.
 
"Lessee" means the individual who pays a fee to the lessor to use real or personal property.
 
"Lessor" means the owner of leased property.
 
"Capital Lease" means a lease of real or personal property that meets the criteria for capitalizing an asset and recording a liability in the accounting records as established by FASB Statement No. 13, Accounting for Leases.
 
"Operating Lease" means a lease of an asset over a term of one year or more that does not meet the criteria for a capital lease.
 
"Rent" means a fee paid to the owner of property for the use of that property for a specified time period.

 
Lease Authority
  1. A lease is a contract and shall be in writing.
  2. In accordance with City Code 5.33.030, the Purchasing Agent must execute contracts for the lease of supplies, materials, equipment, labor, contractual services, and personal services if less than $500,000 annually. Contracts of $500,000 or more per year require Council approval.
  3. In accordance with City Code 3.15.080(C) the Chief Administrative Officer is authorized to execute agreements to rent or lease non-City-owned property for use by the City, City-owned commercial, industrial or residential property, or City-owned property that is being held for future City use.

 
Criteria for Identifying Capital Leases
  1. If a lease meets any one of the following four criteria, it 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 exercise a provision in the lease to purchase the leased property for a price sufficiently lower than the expected fair value of the property, and the exercise of this option at the inception of the lease is reasonably assured.
    -The lease term is equal to 75 percent or more of the estimated economic life of the leased property. The estimated economic life is the estimated remaining period that the property is expected to be usable with normal repairs and maintenance.
    -The present value of the minimum lease payments is 90% or more of the fair value of the leased property.

    Note: If, at the start of the lease term, there is 25% or less total life of the property remaining, the third and fourth bullets do not apply.
  2. In addition to meeting one of the preceding criteria, the lease must not have a cancellation clause to be considered a capital lease. A true cancellation clause allows the lessee to terminate the lease at any time for any reason. A clause specifying the cancellation of the lease due to non-appropriation of funds does not eliminate the possibility that the lease is a capital lease.

Lease Accounting
  1. When a lease meets the criteria for a capital lease, an asset and liability shall be reported in the accounting records at the lower of the fair value of the asset or the present value of the minimum lease payments.
    •If capital lease property has been leased by a proprietary fund or a fiduciary fund, the asset and liability shall be recorded in the accounts of the fund and depreciation shall be recorded in the fund operating statement.
    •If capital lease property has been leased by a governmental fund, the asset and liability and the depreciation expense shall not be recorded at the fund level but should be recorded in the governmental activities column of the government-wide statement of net assets.
    •When capital lease property is disposed of, the asset, related accumulated depreciation and any remaining liability shall be removed from the accounting records.
  2. If the capital lease meets the ownership transfer or bargain purchase criteria, the property shall be amortized over the life of the property. If the capital lease meets the economic life or the present value criteria, the property shall be amortized over the term of the lease.
  3. If the lease does not meet the criteria for a capital lease, the lease shall be charged to operating leases. Appropriate accruals shall be made at year-end if the fiscal year-end occurs between payment dates.

Lessee Capital Lease Disclosure Requirements
The following disclosures are required for capital leases in accordance with Generally Accepted Accounting Principles:
  • A description of the general leasing arrangements
  • Disclosure of the gross amount of assets recorded under capital leases presented by major asset class and the total amount of accumulated depreciation.
  • Separate identification of related obligations as capital lease obligations in the balance sheet with classification as current or non-current as appropriate.
  • Disclosure of the minimum future lease payments in total and for each of the next five years, presenting a deduction for the amount of imputed interest to reduce the net minimum future lease payments to their present value

 
Lessee Operating Lease Disclosure Requirements
The following disclosures are required for operating leases in accordance with Generally Accepted Accounting Principles:
  • A description of the general leasing arrangements
  • Disclosure of the future minimum rental payments in total and for each of the next five years for non-cancelable leases of more than one year
  • Disclosure of current year rental costs

 
Lessor Capital Lease Disclosure Requirements
The following disclosures are required for lessor capital leases in accordance with Generally Accepted Accounting Principles:
  • A description of the general leasing arrangements
  • The total future minimum lease payments receivable with separate deductions for executory costs and uncollectibles
  • Unguaranteed residual values accruing to the government
  • Minimum lease receipts for each of the five succeeding fiscal years
  • Any unearned income offset against initial direct costs
  • Total contingent rentals of the period

 
Lessor Operating Lease Disclosure Requirements
The following disclosures are required for lessor operating leases in accordance with Generally Accepted Accounting Principles:
  • A description of the general leasing arrangements
  • Cost and carrying amount of leased assets
  • Depreciation on leased assets
  • For noncancelable leases, minimum future rentals in the aggregate and for each of the five succeeding fiscal years
  • Total contingent rentals of the period

 
Responsibility for Reporting
  1. It is the responsibility of bureau staff to prepare journal entries to record capital and operating leases in accordance with guidelines established by the Accounting Division.
  2. It is the responsibility of bureau staff to provide required disclosure information to the Accounting Division for financial statement note disclosure purposes in accordance with guidelines established by the Accounting Division. 
  3. When uncertainty exists as to required journal entries or disclosure information, it is the responsibility of bureau staff to consult with the Accounting Division for guidance.

 
History
Resolution No. 36248, originally adopted by Council September 1, 2004.
Revised by Resolution No. 36435, adopted by Council September 6, 2006.