| 1. |
POLICY |
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Lease purchases of fixed assets are to be accounted
for in a manner similar to purchases of fixed assets
with long-term credit terms. |
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| 1.1 |
Purpose |
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To account for lease purchases in accordance
with generally accepted accounting principles. |
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| 1.2 |
Authority |
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Authority
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Subject |
Board of
Supervisors' Resolution No. 82-162
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Authorizes the Auditor-Controller
to prescribe accounting policies.
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Accounting Standards and Procedures
for Counties, State of California,
Ch. 11.17 to 11.20.
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Defines capital and operating
leases.
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Financial
Accounting Standards Board Statement
No. 13, as amended and interpreted.
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Establishes standards
of financial accounting and reporting
for leases. |
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| 1.3 |
Definitions |
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| 1.3.1 |
Lease Purchases (Capital Leases) |
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Leases of fixed assets which transfer
substantially all benefits and risks
of ownership to the lessee. A lease
meeting any one of the following criteria
is considered to be a lease purchase:
- The lease transfers ownership
of the property to the County by
the end of the lease term.
- The lease contains a bargain purchase
option, exercisable at lessee's
option, to purchase the lease property
for a price which is sufficiently
lower than the expected fair value
of the property at the date the
option becomes exercisable so that
exercise of the option appears,
at the inception of the lease, to
be reasonably assured.
- The lease term is equal to at
least 75% of the remaining estimated
economic useful life of the leased
property. (This is not applicable
if the lease begins in the last
25% of the asset's total useful
life.)
- The present value of the required
lease payments equals or exceeds
90% of the fair value of the lease
property. (This is not applicable
if the lease begins in the last
25% of the asset's total useful
life.)
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| 1.3.2 |
Operating Leases |
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All leases other than lease purchases.
Lease payments are charged to the appropriate
lease expenditure/expense account, Object
Code 2100 (Rents and Leases - Equipment)
for equipment and Object Code 2200 (Rents
and Leases - Buildings and Improvements)
for real property. |
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| 2. |
PROCEDURE |
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| 2.1 |
Budgeting |
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Appropriations for lease purchases are to
be budgeted using the appropriate debt service
(debt principal and interest) expenditure
objects (see Exhibit
II). Principal payments are to be budgeted
and recorded in Object Code 3251 (Lease Purchase
Principal Payment) and interest payments in
Object Code 3351 (Lease Purchase Interest
Payment). |
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| 2.2 |
Identification of Lease Purchases |
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All lease purchases must be identified as
such by the acquiring department/agency or
by CEO/Purchasing. At the inception of any
lease, the department or agency must complete
the Lease Certification Form (Exhibit
I) to determine whether the lease is a
lease purchase or operating lease. The head
of the department/agency signs the completed
form, which is then forwarded to the Auditor-Controller
General Ledger Unit for approval. The department/agency
should maintain copies of the documentation
that supports the lease classification.
Purchase Orders must have a completed principal/interest
payment schedule (see Exhibit
II) attached to the Auditor-Controller's
copy. When there are multiple items being
acquired on a Purchase Order, the principal/interest
totals for each fixed asset must be provided.
The Deputy Purchasing Agent should obtain
this payment schedule from the vendor.
Note: Some leases fall under the provisions
of the County's Public Financing Policies
and Procedures and may require approval by
the Public Finance Advisory Committee prior
to submission to the Board. The CEO Public
Finance Manager should be consulted for guidance
prior to initiating any lease. |
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| 2.3 |
Accounting Treatment |
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| 2.3.1 |
Capitalization |
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Upon making the first payment, the
Auditor-Controller capitalizes the asset
by recording it in the Fixed Asset Accounting
System. The recorded cost of the asset
is the total principal to be paid over
the life of the lease. |
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| 2.3.2 |
Depreciation |
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The asset is depreciated in accordance
with the normal depreciation policy
of the lessee fund over the asset's
life. |
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| 2.3.3 |
Principal Balance |
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Each year, the General Long-Term Debt
Account Group is adjusted by the Auditor-Controller
Department to reflect the remaining
principal balance due on lease purchases
by non-proprietary funds. |
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| 2.3.4 |
Financial Statement Presentation |
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For financial statement presentation,
debt principal payments by proprietary
funds (enterprise and internal service
funds) are reclassified as reductions
of debt principal instead of expense. |
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