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Glenn Hegar  ·  Texas Comptroller of Public Accounts

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Leases
Capital Leases

Many agencies make capital purchases on a capital lease plan. Essentially, the agency makes installment payments with an interest cost associated with the payments. After the final payment, the asset belongs to the agency.

Capitalize a lease if any one of the following criteria is a characteristic of the lease transaction:

  • 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 equals 75 percent or more of the estimated economic life of the leased property.
  • The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair value of the leased property.

In addition to the above criteria, the cost of the underlying leased asset must meet the standard capitalization threshold for the lease to be recorded as a capital lease. If a lease does not meet any of the above criteria or if the cost of the underlying leased assets does not meet the standard capitalization threshold, record the lease as an operating lease.

Transactions in governmental funds record an expenditure (capital outlay) and an other financing source (increase in obligations under capital leases) on the fund financial statements in the first year. The present value of the lease payments is recorded on the government-wide financial statements as capital assets and capital lease obligations.

In subsequent years, only expenditures are reported for governmental funds. Identify interest and principal payments separately on the fund financial statements. Capital assets are no longer affected after the first year except for depreciation. The liability on the government-wide financial statements declines each year by the amount needed to reverse out the principal amount expenditure on the fund financial statements.

The accounts used to report capital leases for governmental funds are:

Fund Financial Statements (FFS)
(Statement of Revenues, Expenditures and Changes in Fund Balances only)

Expenditures

  • Capital outlay (debit)
  • Debt service – principal – capital leases (debit)
  • Debt service – interest (debit)

Other Financing Sources

  • Increase in obligations under capital leases (credit)

Government-wide Financial Statements

Capital Assets Adjustment (Fund Type 11)

Statement of Net Position

  • Capital assets
  • Accumulated depreciation
  • Net position – net investment in capital assets

Statement of Activities

  • Reverse – capital outlay (credit to reverse FFS debit entry)
  • Depreciation expense (debit to record expense for the year)

Long-Term Liabilities Adjustment (Fund Type 12)

Statement of Net Position

  • Capital lease obligations, current* and noncurrent portion
  • Net position – net investment in capital assets

Statement of Activities

  • Increase in obligations under capital leases (debit to reverse FFS credit entry)

* Current portion includes the amount of principal due within one year only. Interest is not included in the “current” portion.

Illustrative Amortization Schedule:

Payments Principal Interest Total Remaining
Principal Balance
Total Principal       $80,000
First Year $17,000 $8,000 $25,000 63,000
Second Year 19,000 6,000 25,000 44,000
Third Year 21,000 4,000 25,000 23,000
Final Year 23,000 2,000 25,000 0
Totals $ 80,000 $ 20,000 $ 100,000 $ 0

Report Presentation:

Fund Financial Statements First Year Second Year Third Year Final Year
Operating Statement:
Expenditures:
Capital Outlay $80,000      
Debt Service – Principal – Capital Leases 17,000 $19,000 $21,000 $23,000
Debt Service – Interest 8,000 6,000 4,000 2,000
Other Financing Sources (Uses)
Increase in Obligations Under Capital Leases $80,000      
Government-wide Financial Statements (Schedule 4)
Statement of Net Position:
Long-Term Liabilities Adjustment (Fund Type 12)
Net Position Net Investment in Capital Assets (debit) $63,000 $44,000 $23,000 $0
Capital Lease Obligation (credit) 63,000 44,000 23,000 0
Capital Assets Adjustment (Fund Type 11)
Capital Assets (debit) $80,000 $80,000 $80,000 $80,000
Net Position Net Investment in Capital Assets (credit) 80,000 80,000 80,000 80,000

Attention: Agencies may use COBJ 7802, Interest – Other, to record interest on capital leases.

Capital Leases are Reported in Note 5 – Long-Term Liabilities and
Note 8 – Leases

  • Note 5:

    Capital lease obligations are presented in Note 5 with the beginning balance, additions, reductions, ending balance and amounts due within one year.

  • Note 8:

    The present value of net minimum capital lease payments tie directly to “Exhibit I – Capital Lease Obligation” under the long-term liability adjustments.

Glenn Hegar
Texas Comptroller of Public Accounts
Questions? Contact statewide.accounting@cpa.texas.gov
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