State Of Idaho
Office Of The State Controller
2017 GAAP Closing Procedures Manual

04 Leases Receivable

Due Date: July 10

Complete this closing package if your agency has leases receivable with total payments over the lease term of $10,000 or more per lease. Do not report subleases receivable that are already reported on Closing Package 03 Leases Payable.

PURPOSE

The purpose of this closing package is to gather information regarding leases receivable. This information will be used to prepare the State's Comprehensive Annual Financial Report (CAFR).

ACCOUNTING PRINCIPLES AND POLICIES

The State prepares its financial statements in accordance with Generally Accepted Accounting Principles (GAAP). GAAP for leases can be found in GASB Codification Section L20—Leases. Click here for Idaho's FPAC policy on Leasing Activities.

The State's policy is to report in its June 30 financial statements all leases receivable for direct financing and noncancelable operating leases from nonstate parties if the total payments to be received are $10,000 or more per lease.

Direct Financing Leases

GAAP requires the State to record transactions for direct financing leases by fund type, as follows:

The amount recorded as an asset must be removed from the books of the respective fund.
A receivable, a sale, and unearned income must be set up in the respective fund (normally the present value of the future minimum lease payments to be received plus the unguaranteed residual value of the leased property).
Accrued interest is recorded at fiscal year end.
Revenue from sales-type transactions (or other financing sources - sale of equipment) and interest revenue should be recorded upon receipt of payments or when revenue becomes available in time to pay liabilities of the current period (within 60 days of fiscal year end).
The difference between the total lease receivable and the carrying value of the leased property represents unearned interest income which should be amortized over the lease term using the effective interest method.
Establish an allowance account for uncollectible payments.
Report total contingent rentals actually incurred for each period.
Payments received are recorded to the respective receivable from direct financing leases and interest receivable.

GAAP requires the following disclosures for direct financing leases:

Components of the net investment in direct financing leases as of June 30
Future minimum lease payments to be received, with separate deductions for
The unguaranteed residual values accruing to the benefit of the lessor
Unearned income
Future minimum lease payments to be received for each of the five succeeding fiscal years and in five-year increments thereafter, as of the date of the latest balance sheet presented
The amount of unearned income included in the activity statement to offset initial direct costs charged against revenue for the fiscal year
Total contingent rentals included in revenue for the fiscal year
A general description of the leasing arrangements

Operating Leases

GAAP requires the State to record transactions for operating leases as follows:

For governmental funds, record rent revenues as they become measurable and available. For proprietary funds record rent revenue as they become earned and realized or realizable. This requirement includes leases with systematic and rational rent increases. The leased property is not removed from fixed assets.
For leases with artificially low payments in particular years, rental income should be recorded using either the
- Straight-line method (record a receivable when payments are artificially low), or
- Estimated fair-value method (interest income is recorded at a consistent rate over the life of the lease).

GAAP requires the following disclosures for operating leases:

The cost and carrying amount, if different, of property on lease or held for lease organized by major classes of property and the amount of accumulated depreciation in total as of June 30
Minimum future rentals on noncancelable leases as of June 30, in the aggregate and for each of the succeeding five fiscal years
Total contingent rentals included in income for the fiscal year
A general description of the leasing arrangements

GAAP INDICATORS

If GAAP Indicators are used when processing transactions in STARS, the GAAP Indicator Report, DAFR0227, can be submitted in lieu of transcribing the information on the closing package.

GAAP Indicator applicable to the Leases Receivable Closing Package:

J - Miscellaneous Receivables with Nonstate Parties

Click here for a GAAP Indicator Explanation

DEFINITIONS

Allowance for Uncollectibles - An amount of leases receivable reported as of June 30, which are not expected to be received.

Available - The government has collected the revenues in the current period or expects to collect them soon enough after the period to pay liabilities of the current period (within 60 days after the end of the period).

Contingent Rentals - Lease income that is dependent upon some future occurrence, but is generally not included in the minimum lease payments. A lease might contain a clause that if usage exceeds a certain amount, an "additional charge" will be incurred. The "additional charge" would be considered a contingent rental.

Direct Financing Lease - A sales-type lease in which the lessor finances the in-substance sale of the asset. Direct financing leases transfer substantially all of the risks and benefits of ownership from the lessor to the lessee. If at its inception, a noncancelable lease meets one or more of the following four criteria and both of the additional criteria provided below, it is classified as a direct financing lease by the lessor:

The lease transfers ownership of the property to the lessee by the end of the lease term.
The lease contains a bargain purchase option.
The lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion should not be used for purposes of classifying the lease.
The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the fair value of the leased property to the lessor at the inception of the lease. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion should not be used for purposes of classifying the lease.

Additional criteria:

The collectability of minimum lease payments is reasonably predictable.
No important uncertainties exist concerning the amount of unreimbursable costs yet to be incurred by the lessor. Important uncertainties might include commitments by the lessor to guarantee performance of the leased property in a manner more extensive than the typical product warranty; another might be to effectively protect the lessee from obsolescence of the leased property. Estimating executory costs does not constitute an important uncertainty.

Earned - Revenues are considered earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.

Executory Costs - Costs such as insurance, maintenance, and taxes.

Future Minimum Lease Payments - The payments the lessee is obligated to make or can be required to make in connection with the leased property. In determining the present value of the minimum lease payments, the lessor should use its implicit interest rate.

Implicit Interest Rate - The discount rate that equates the present value of the minimum lease payments plus the unguaranteed residual value to the fair value of the leased property at the inception of the lease.

Initial Direct Costs - Costs incurred by the lessor that are:

incurred in transactions with independent third parties that:
directly related to specified activities performed by the lessor for that lease.

Lease - An agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets) usually for a stated period of time. It includes agreements that, although not nominally identified as leases, meet the above definition. This definition does not include:

agreements that are contracts for services that do not transfer the right to use property, plant, or equipment from one contracting party to the other. However, agreements that do transfer the right to use property, plant, or equipment meet this definition even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets.
agreements concerning the rights to explore for or to exploit natural resources such as oil, gas, minerals, and timber.
licensing agreements for items such as patents and copyrights.

Lessee - A person or entity that receives the right to use property, plant, or equipment owned by a lessor.

Lessor - A person or entity that owns property, plant, or equipment and rents or leases it to a lessee.

Noncancelable Lease - A lease that does not include any cancelable terms. Any of the following terms would make a lease cancelable:

only upon the occurrence of some remote contingency
only with the permission of the lessor
only if the lessee enters into a new lease with the same lessor, or
only if the lessee incurs a penalty in such amount that continuation of the lease appears, at inception, reasonably assured.

A fiscal funding or cancelation clause that permits a lessee to terminate an agreement if funds are not appropriated to make required payments does not exempt a lease from being considered noncancelable unless the possibility of cancelation due to the clause is more than remote.

Operating Lease - A lease with a term considerably less than the useful life of the asset and does not transfer ownership. Operating leases do not meet the criteria of direct financing.

Realized - When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash.

Realizable - When assets received or held are readily convertible into cash or claims to cash.

Triple Net Lease - A lease in which the lessee is to pay all operating expenses of the property or equipment and the landlord receives a net rent. For land and building leases, the tenant pays all taxes, utilities, insurance, repairs, and janitorial service. For personal property, the expenses paid by the lessee may also include license fees. Debt service and income taxes are the responsibility of the lessor or owning agency.

Unguaranteed Residual Value - The expected fair value of the leased property at the end of the lease term, excluding the amount of any guarantees included in the minimum lease payments.

WORKING PAPERS
Click here for a definition of Working Papers

GENERAL INSTRUCTIONS--LEASES RECEIVABLE CLOSING PACKAGE

Internal schedules may be submitted in lieu of Leases Receivable Closing Package if they provide all required information.
Round all dollar amounts to the nearest whole dollar.
Combine all proprietary funds on one closing package and all governmental funds on another.
Enter the total required future minimum rental payments per year for the next five years and in five year increments thereafter.
CLICK HERE FOR SUBMISSION INSTRUCTIONS
Submit the completed form to the Office of the State Controller by July 10.

COMPLETING THE 4a OPERATING LEASES RECEIVABLE CLOSING PACKAGE

Enter FAS property number, or if your agency is not in FAS, enter NIF.
Enter the original cost of the assets being leased and group by major class.
Record accumulated depreciation.
Enter the total contingent rentals received for all qualifying operating leases.
Enter the Total Initial Direct Costs per lease.
In the Comment box provide a general description of the leasing arrangements.

COMPLETING THE 4b DIRECT FINANCING LEASES RECEIVABLE CLOSING PACKAGE

Enter a brief description of the item being leased.
Enter the total dollar amount of minimum lease rental payments to be received.
Enter the portion of the minimum lease rental payments representing interest.
Enter the portion of the minimum lease rental payments representing executory costs.
Enter the portion of the minimum lease rental payments representing any profit on executory costs.
Record any accumulated allowance for uncollectible minimum lease payments receivable.
Enter the Total Initial Direct Costs per lease.
Enter the unguaranteed residual values of leased property accruing to the benefit of the lessor.
If your agency has any contingent rentals, enter the total amount of revenue received from the lessee(s) for the current fiscal year.
Enter any unearned income for all direct financing leases for the current fiscal year.