Fordham University            The Jesuit University of New York

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Capital Lease

Capital Lease

Capital Lease Definitions
Criteria for a Capital Lease 
Budget Implications
Budget Transfers
Cost Transfers

Capital Lease Definitions

The following table provides a summary of Statement of Accounting Standards No. 13 (SFAS 13) dealing with the criteria for capitalization of leases.

Minimum Rental Payment The MRP consists of the minimum payments required under the lease agreement by the lessee to the lessor. The term indicates that additional payments above the minimum might be involved in the lease agreement, but most of the major decisions required are concerned.
Minimum Lease Payment The MLP may be different from the MRP; and, in some cases, it may be the same. The MLP will always include the MRP, but can include other items, if specified in the lease. The MRP can include one or more of the following:
Guarantee of residual value by the lessee.
Payment required for failure to renew or extend the lease.
Bargain purchase option payment.
Lessor’s Implicit Interest Rate This is the rate of interest that will equate the present value of the MLP, after certain deductions, with the fair value of the leased property.
Lessees Incremental Borrowing Rate This is the rate of interest that the lessee would have to pay to borrow the funds necessary to purchase the leased property rather than enter into the lease agreement.

Criteria for a Capital Lease

There are four criteria used to determine whether a lease is a capital lease or an operating lease.


   1. Is ownership in the asset transferred to the lessee at the end of the lease? If YES, then the lease is a capital lease. If NO, then apply criterion 2 below.
   2. Does the lease contain a bargain purchase option? If YES, then the lease is a capital lease. If NO, then apply criterion 3 below.
   3. Is the lease term 75% or more of the asset life? If YES, the lease is a capital lease. If NO, then apply criterion 4 below. Note that the lease must be non-cancelable for this criterion to apply. Note also that the lease term should include the periods covered by a bargain renewal option.
   4. If the present value of the Minimum Lease Payments (MLP – defined above) is 90% or more of the fair value of the leased property at the inception of the lease, it assumed that the lessee will "pay for" the asset leased and should therefor treat it as if it were purchased, i.e., as a capital lease.

Budget Implications

Computer acquisitions via leases may involve the following:
Budget transfers, or
Cost transfers.

Budget Transfers

If a department has excess budget funds with which it is authorized to obtain leased computer equipment, the procedure will be as follows:
Prepare a budget transfer from the department involved to the CAD for the fair value of the equipment to be acquired. (see Note below).
For equipment acquired under a capital lease, Object Code 5897 should be used.
The CAD will then either draw the equipment from inventory, or include it in a subsequent lease agreement.
The budget transfer will cover the additional cost to the CAD.

Departments receiving computer equipment purchased under capital leases will be charged for the full cost of the equipment, as though the equipment had been purchased outright.

Cost Transfers

As noted, restricted and grant organizations will budget individually for computer equipment.

The following have also decided to budget within the school for leased computer equipment, the:

        · Graduate School of Business Administration

        · Graduate School of Social Service, and

        · Fordham University Law School.

The following table describes two Cost transfer situations:

Cost Transfers
Computer equipment is provided by the CAD out of inventory, A cost transfer will be prepared, transferring the full cost from the CAD to the organization receiving the equipment.
An entire lease is for one of these entities, The lease fair value should be charged directly to that Organization, rather than passing it through Fund 70.
In this case, there would be no budget transfer, since budget and the charge would be in the recipient organization’s budget.

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