GAAP Forms - OSF Form L-1 Instructions

L. LEASE CONVERSION PACKAGE

• OSF Form L-1: Lease Summary (.xls, 71 KB)

I. PURPOSE AND OBJECTIVES

The CAFR presents the state's lease obligations as of June 30.  Further, the State Bond Advisor is charged with collecting certain information regarding leases made by the state.  The Office of State Finance (OSF) together with the State Bond Advisor has prepared this conversion package to meet the needs of both offices.

There are two classifications of leases, operating leases and capital leases (including COP’s-certificates of participation).  A lease agreement is classified as a capital lease when substantially all of the risks and benefits of ownership are assumed by the lessee.  For accounting purposes, a capital lease is viewed as an installment purchase of property rather than the rental of property.  All other leases are classified as operating leases.

The state requires a fiscal funding or cancellation clause that permits governmental lessees to terminate the agreement on an annual basis if funds are not appropriated to make required payments.  The fiscal funding or cancellation clause should not prohibit the lease agreements from being capitalized.  For purposes of this conversion package, only leases meeting the criteria below are considered reportable leases.  All other leases are included only as a reconciling item on line 10 of Form L-1.

Reportable leases are:

Operating leases where rental payments (excluding executory costs) equal or exceed $833 a month and are for a period of 1 year or longer.  If payments are not made on a monthly basis (annually, quarterly, etc.), adjust the payments to what they would be on a monthly basis and use this amount to determine if the lease is a reportable lease.

Capital leases where the fair market value of the leased asset at inception of the lease is $25,000 or more.  This criteria has changed from prior fiscal years and should be applied only to new leases beginning during or after fiscal year 1998.  Do not go back and apply this criteria to existing leases as of June 30, 1997; however, these existing leases will remain reportable until the lease term is completed or the lease is terminated.

Leases consisting of multiple items (e.g., copy machines, pagers, etc.) should be prorated among each individual item to determine if a lease meets the appropriate reporting criteria.

All leases with other state agencies are not reportable leases and are only included as a reconciling item on line 11 of Form L-1.
 

II. AGENCY ACTION REQUIRED

A. Carefully read the key terms in Part III.

B. The Lease Summary form (summary) should reflect amounts as of close of business on June 30.

C. Round all dollar amounts to the nearest whole dollar.

D. All working papers are subject to audit by the State Auditor & Inspector (SA&I).  The agency is required to keep a copy of the completed summary form and all associated working papers for three years after the completion of the SA&I audit.

E. The person who completes and signs the summary form should keep a copy.  OSF will contact this person if there are any questions.

F. If needed, call your agency’s financial reporting analyst for guidance.

G. Return the following forms and documentation to the State Bond Advisor, 5900 N. Classen Blvd., Oklahoma City, OK  73118, no later than the due date shown on the form.  If you can return it earlier, please do so.  

• Form L-1, Lease Summary.
• Form L-2, Lease Worksheet, for EACH NEW LEASE ONLY.
• Form L-3, Status Report for leases existing at prior year end.
• Form L-4, Depreciation Worksheet for assets acquired by capital lease.
• The latest Department of Central Services (DCS) requisition for each new lease.
• Debt service (amortization) schedule for each new capital lease, which may be obtained from the lessor.

H. If the summary form does not apply to your agency, check the box in the upper left portion of the summary, complete item (2) and return it to the State Bond Advisor.

III. KEY TERMS

A. Bargain Purchase is when the lessee's purchase price is sufficiently less than the fair value.

B. Depreciation is the annual deduction allowed to recover certain costs of “reportable fixed assets” over a fixed time period.  Straight-Line depreciation with a ½ year convention in the year of acquisition (year lease begins) and a ½ year convention in the year of disposal (year lease terminates if option to own asset is not exercised) must be used.  It should be noted that when calculating the depreciation for an asset in which the ownership does not transfer to the lessee at the end of the lease term, the useful life of that asset cannot be for a period longer than the lease term.  

C. Executory Costs are insurance, maintenance, taxes, excess copy charges, or other costs that may be included in a lease payment.

D. Lease  is any contract that commits the state to periodic rental payments.

Capital lease  (including a certificate of participation-COP) is a lease meeting any one of the following four criteria:

1. The lease transfers ownership of the property to the lessee by the end of the lease term.

2. The lease contains a bargain purchase option.

3. The lease term is equal to 75 percent or more of the estimated economic life of the lease property.

4. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.

Operating lease  is a lease that meets none of the above criteria.

E. Lessor  is the party that receives the periodic rental payments.

F. Lessee  is the party that makes the periodic rental payments.

G. Lessee's Incremental Borrowing Rate is the estimated interest rate the lessee would have had to pay if the leased property had been purchased by the lessee and financed over the period covered by the lease.  

H. Lessor's Implicit Interest Rate is the interest rate calculated by the amortization of the lease payments under the terms of the lease.

I. Minimum Lease Payments are periodic rental payment required in the terms of the lease.

J. Rental Expenditures are non-periodic rental payments.
 

IV. SPECIFIC INSTRUCTIONS

A. Completing the Status Report for Leases Existing at Prior Year End, Form L-3

1. This is completed by OSF staff.  The number is taken from the worksheet submitted by you for the prior fiscal years.

2. This is completed by OSF staff.  The description is taken from the worksheet submitted by you for the prior fiscal years.

3. This is completed by OSF staff.  The amounts are taken from the amortization / payment schedule provided by you at the inception of the lease.

4. Dollar amount of fiscal year expenditures per your agency's records:

a. Operating leases - provide dollar amount of fiscal year expenditures in the principal column.
b. Capital leases - separate the dollar amount of fiscal year expenditures between principal and interest.
c. Certificates of Participation - separate the dollar amount of fiscal year expenditures between principal and interest.

5. Explain any differences between the amounts reported in columns 3 and 4.  For example, if you made only 11 monthly lease payments during the current fiscal year and did not make the 12th payment until after the end of the fiscal year then this would create a difference between the amounts reported in columns 3 and 4.

6. If the agency will be paying lease payments for this specific piece of property in July, answer YES and skip #7, #8, and #9.

7. Provide the date the lease was ended.

8. If ownership of the property transferred to the your agency, mark YES, if not mark, NO.  If you answered yes to this question, you will need to report this asset on Conversion Package H, Line 4.

9. If you answered YES to #8 above, list any payments made to vendor at termination.

10. This is completed by OSF staff.  The amounts are taken from the worksheets submitted by you for the prior fiscal years.

11. Note any significant changes to existing leases.

B. Completing the lease worksheet, Form L-2

Complete a separate worksheet only for EACH NEW LEASE entered into during the fiscal year ended June 30.

ONLY REPORT LEASES THAT MEET THE CRITERIA OF A REPORTABLE LEASE AS DEFINED ON PAGE L-1, SECTION I.  LEASES CONSISTING OF MULTIPLE ITEMS (e.g., COPY MACHINES, PAGERS, etc. ) SHOULD BE PRORATED AMONG EACH INDIVIDUAL ITEM TO DETERMINE IF LEASE MEETS REPORTING CRITERIA. EXCLUDE LEASES WITH OTHER STATE AGENCIES.

Obtain the latest DCS requisition and the debt service (amortization) schedule for each new lease, and complete each box as follows:

1. DCS Central Purchasing requisition number.

2. The State should record a capital lease at an amount equal to the present value of the minimum lease payments; however, the amount recorded cannot exceed the fair market value of the leased property.  These two amounts are normally equal.

a. Present value of the minimum lease payments may be obtained from the Lease Worksheet L-2, page 2, question number 4.

b. The fair market value of the leased property at inception of the lease is the amount that you would have paid if you had purchased the asset outright.  If this information cannot be deter-mined from the agency's records, it can be obtained from the lessor or Central Purchasing.

3. The total economic life of the leased property in years.  If the economic life of the asset is unknown, Schedule A is provided for guidance only by general category of asset.

4. The estimated economic life remaining of the asset in years at the beginning of the lease term.  If the asset is new, the remaining life will equal #3 above.  If the equipment or building is used, this amount will be less than #3 above.  For example, if you lease a building in 1990 which was built in 1980 and has a economic life of 30 years, it has a remaining life of 20 years.

5. The month and year the lease term begins (not the date the lease is signed).  This is usually the date the leased property is obtained.

6. The total number of payments.  For example 60 payments over 5 years.

7. The beginning of the period is the 1st - 15th, the end is the 16th - 31st.

8. The lower of lessee's incremental borrowing rate or the lessor's implicit interest rate.  The lessor's implicit interest rate can be obtained from the lessor.

9. If the lease automatically transfers ownership of the property to the lessee by the end of the lease term, enter Y; if not, enter N.

10. The dollar amount of the bargain purchase option stated in the lease.

11. A)  The dollar amount to be paid by the lessee for each payment.
B)  Specify the payment period (i.e., monthly, quarterly, annually).

12. For example, if lease rental payments are made quarterly, enter "4".

13. Annual Minimum Lease Payment.  Box 11 x Box 12.

14. The amount of insurance costs included in each lease payment.

15. The amount of maintenance costs included in each lease payment.

16. The amount of other executory costs included in each lease payment.  If a break down of executory costs is not available, enter the total here.  The total executory costs can be found by taking the difference between the first purchase option price in the lease and the original amount financed.  The original amount financed may be found on the DCS Central Purchasing requisition number.

17. Provide a detailed description of each asset and classify the asset into the appropriate type.  For example land and buildings require the location. Buildings need a brief description of the type.  Equipment should include make and model and a brief descriptive narrative of the item.  The types are:

1. Land
2. Building
3. Equipment

18. Name of the vendor providing the equipment.

19. Name of the entity providing the financing.

20. Classify each lease as a capital lease or an operating lease using the criteria on page 2 of the Lease Worksheet.

21. Provide the minimum lease payments from the current fiscal year through the end of the lease.  Capital lease requires that the payments be divided into principal, interest, and executory costs.  For operating leases, provide only a total payment amount.  Attach a schedule showing breakdown by year if more space is needed.

22. Provide the fund number from which the lease payment is paid.

23. For operating leases, provide the rental expenditures for the fiscal year ended June 30.

24. For capital leases, provide the principal, interest, and executory costs of the lease payments for fiscal year ended June 30.

PLEASE NOTE:  ALL CAPITAL LEASES MUST HAVE A DEBT SERVICE (AMORTIZATION) SCHEDULE ATTACHED.  AN AMORTIZATION SCHEDULE SPREADSHEET IS AVAILABLE UPON REQUEST.  

C. Completing the depreciation worksheet, Form L-4

Included and online is a worksheet for calculating accumulated depreciation as of the beginning of the current fiscal year and depreciation expense for the fiscal year.  If you would like to receive a disk containing this form, contact your financial reporting analyst.

Complete all columns for each asset being purchased by either a capital lease or a certificate of purchase.  When ownership of the asset is transferred to the reporting agency, the asset is removed from the depreciation worksheet for Conversion Package L and included on the depreciation worksheet for Conversion Package H.

1. List each asset included on form L.3 and any new capital lease assets as determined on worksheet forms L.2 in the appropriate categories.

2. Enter the fiscal year the asset was placed in service.

3. If the asset was disposed of, enter the date of disposition.

4. Enter the present value of the minimum lease payments unless this amount is greater than the fair value of the asset at the inception of the lease.  (see Form L-3, column 10 for assets in service at the end of the prior year and Form L-2, box 2 for new capital leases or certificates of participation).

5. Enter the estimated salvage value of asset.

6. Enter the total economic life in years.  For assets in which ownership does not transfer to the lessee at the end of the lease term, the economic life for that asset should not be greater than the lease term.  Schedule A is provided for guidance only by general category of asset.  The life used for depreciation purposes should be the same as the life used on Form L-2.

7. List the prescribed depreciation method:  Straight-Line depreciation with half year convention (i.e., ½ year depreciation in year of purchase and ½ year depreciation in year of disposal).

8. Accumulated depreciation at the beginning of the current fiscal year.  This is calculated as follows:
 

A) Current Fiscal Year less Fiscal Year Placed in Service minus .5 = Previously Depreciated Years   
B) Historical Cost less Salvage Value = Total to be Depreciated
C) Result from Step B divided by Estimated Useful Life (yrs) = Annual Depreciation
D) Result from Step A multiplied by Result from Step C = Accumulated Depreciation at beginning of fiscal year.

This can be summarized as:   

Where:
HC = Historical Cost
SV = Salvage Value
EUL = Estimated Useful Life
CY = Current Fiscal Year
YPS = Year Placed in Service

Example:  A computer system was leased in FY 1997 for $50,000 with an estimated salvage value of $5,000. Using straight-line depreciation and an estimated useful life of 5 yrs, accumulated depreciation is calculated as follows:

A) 2000 - 1997 - .5 = 2.5
B) $50,000 - $5,000 = $45,000
C) $45,000/5 = $9,000
D) 2.5 * $9,000 = $22,500 Accumulated Depreciation at beginning of fiscal year.

9. For assets placed in service in prior years, current year depreciation is the amount calculated in step 8C.  (In the above example, current year depreciation for this asset is $9,000).  For assets place in service in the current fiscal year, current year depreciation would be the amount calculated in step 8C divided by two (1/2 year convention).

10. Total accumulated depreciation is column 8 plus column 9.  (In the above example, this would be $31,500).

D. Completing the Lease Summary Form, Form L-1

Prior to completing the summary form, you should have completed forms L.2, L.3 and L.4 as applicable.

1. Enter the agency CAFR code, name, and funds/accounts to be included on the summary.

2. Provide the name, title, phone number and date for each person who completes and approves this summary form.  The finance officer or executive director should approve the form before sending it to the State Bond Advisor.  Keep a copy of the form.

3. Provide the total rental expenditures for operating leases of buildings (including new building leases from form L-2) for the fiscal year ended June 30.  Only report leases where rental payments (excluding executory costs) equal or exceed $833 a month.  If payments are not made on a monthly basis (annually, quarterly, etc.), adjust the payments to what they would be on a monthly basis and use this amount to determine if the lease is a reportable lease.  Exclude leases with other State agencies.

4. Estimate the ensuing fiscal year expenditures for operating leases of buildings.

5. Enter lease expenditures for existing leases from the status sheet (L.3) totals in column 4.

6. Enter expenditures for new operating leases from the lease worksheets (L.2), box #23.  Exclude new building lease expenditures reported on line #3.

7. Enter principal and interest for new capital leases from the lease worksheets (L.2), box #24.

8. Enter expenditures for building operating leases from lease summary line #3.

9. Total #5 through #8.

10. Enter other small and miscellaneous rental expenditures such as postage meters, meeting rooms, and one-time rentals.

11. Enter rental expenditures made to other State agencies if the payment was made using expenditure codes 3211-3219 or 4311-4315.

12. Enter other reconciling items and specify.

13. Total lines #9 through #12.  This amount should equal your annual expenditures charged to object codes 3211 through 3219 and 4311 through 4315.  If different, provide an explanation in the comment section.  These amounts could differ if leases are recorded using improper expenditure codes.

14. Enter the current fiscal year depreciation from the depreciation worksheet L.4, column 9 total.

15. Enter the total cost and accumulated depreciation for terminated or expired leases if assets have been returned to lessor.

16. Provide comments or explanations as needed.

E. Working Papers

The agency should keep any documents that support data on the summary form.  For example:

• DCS requisitions
• Debt service schedules
• Lease Worksheets
• Lease Summary
• Depreciation Worksheets
• Status of Leases  

Schedule A

Computing depreciation requires an estimated total economic life of the capital asset in years.  Professional judgment should be used to determine lives.  Common life ranges, based upon industry sources are:

Schedule B
Present Value of an Annuity of $1

Periods = Box 6 from the Lease Worksheet
Interest Rate = Box 8 divided by Box 12 from the Lease Worksheet

If the payments are made at the beginning of the period (Box 7 from the Lease Worksheet) convert this table.  Use one less period and add 1.0 to the present value factor.

The preceding image is a table showing the value of a one dollar annuity over 60 periods and at nine different percentage rates. If you need help with accessibility of this image, please call the OSF Service Desk at (405) 521-2444.