Reporting Requirements for Annual Financial Reports of State Agencies and Universities
Record a lease as an operating lease if it does not satisfy the capitalization criteria. In addition, record a lease as an operating lease if the cost of the underlying leased asset does not meet the standard capitalization threshold.
Operating leases are similar to rental expenditures because they are recognized as they become payable. Report expenditures in the financial statement and report the future minimum lease rental payments in Note 8 under non-cancelable operating leases for each of the five subsequent years and in five-year increments thereafter.
GASB 66 provides guidance on operating lease payments that vary from a straight-line basis by removing potential prohibition against the use of the fair value method that is permitted if there are scheduled rent increases.
In order for a lease to be considered cancelable, it must include specific language permitting the lessee to cancel the agreement for any reason after providing the lessor adequate notice. Leases containing the occurrence of remote contingencies or failure of appropriation funding are not considered cancelable and are reported within noncancelable leases.