Exhibit B - Guidelines for Rental vs Lease Expenses

The requirements to conform with Generally Accepted Accounting Principles (GAAP) make it necessary to separately identify rent, capital lease and non-capital lease expenses. A lease is defined as an agreement conveying the right to use property or equipment for a specified period of time. Actual title to the property is not initially transferred to the lessee. A rental/lease agreement must be evaluated to determine whether the transaction should be treated as a rental expense, capital lease or a non-capital lease.

RENTAL CRITERIA

Rental expenditure codes should be used when the total payments over the term of the agreement are $5,000 or less or when the term of the agreement is one year or less. The term specified on the underlying agreement is to be used when making this determination, not the term specified on a purchase order. All payments to agencies within state government are considered rentals.

CAPITAL LEASE CRITERIA

If at its inception a lease meets one or more of the following four criteria, the lease must be classified and accounted for as a capital lease:

  1. The lease transfers ownership to the lessee by the end of the lease term.
  2. The lease contains a bargain purchase option (a provision allowing the University, at its option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable).
  3. The lease term is equal to 75% or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.
  4. At the inception of the lease, the present value of the minimum lease payments, excluding executory costs, to be paid by the lessor, including any profit, equals or exceeds 90% of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. However, if the beginning of the lease falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.

All leases entered into with the University as the lessee which meet any one of the four criteria for classifying leases should be coded as a Capital Lease. Leases which do not meet any of the four capital lease criteria should be coded as a Non-Capital Lease.