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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
Leases Involving Real Estate

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.

Leases Involving Land Only

The lessee accounts for a lease involving land as a capital lease if land is the sole item of property leased that meet capital lease criterion (1) or (2). The lessor accounts for a sale-type lease, if the lease:

  • Transfers ownership of the property to the lessee by the end of the lease term
    –AND–
  • Gives profit (loss) to the lessor

A lease involving land is a direct financing lease, if the lease:

  • Transfers ownership of the property to the lessee by the end of the lease term
    –AND–
  • Does not give profit (loss) to the lessor

If the lease contains a bargain purchase option and meets both sale-type and direct financing criteria, the lessor accounts for the lease as a direct financing lease, a leveraged lease or an operating lease.

If the lease does not meet any of the capital lease criterion and the additional criterion below, treat as an operating lease:

  • Collectability of the minimum lease payments is reasonably predictable
  • No important uncertainties

Leases Involving Land and Building(s)

If either criterion (1) or (2) of capital lease is met, the land and building are separately capitalized by the lessee. When the lease meets neither capital lease criterion (1) nor (2) the following is considered:

  • If the fair value of the land is less than 25 percent of the total fair value of the leased property at the inception of the lease, both the lessee and the lessor will consider the land and the building as a single unit for purposes of applying the capital lease criteria (3) and (4).
  • If the fair value of the land is 25 percent or more of the total fair value of the leased property at the inception of the lease, both the lessee and lessor will consider the land and the building separately for purposes of applying the capital lease criteria (3) and (4).

Leases Involving Equipment and Real Estate

If a lease involving real estate also includes equipment, the equipment is:

  • Considered separately for purposes of applying the criteria for classifying leases
    –AND–
  • Accounted for separately according to its classification by both lessees and lessors

Leases Involving Only Part of a Building

If the cost and fair value of the leased property are objectively determinable, both the lessee and the lessor classify and account for the lease according to Leases Involving Land and Building. If not, the lease is classified and accounted for by the lessee as follows:

  • If the fair value of the leased property is objectively determinable, the lessee classifies and accounts for the lease according to Leases Involving Land and Building.
  • If the fair value of the leased property is not objectively determinable, the lessee classifies the lease according to the capital lease criterion (3) only, using the estimated economic life of the building in which the leased premises are located.

If either the cost or the fair value of the property is not objectively determinable, the lessor accounts for the lease as an operating lease.

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