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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Universities

Leases — Exceptions
Transfer Ownership Contracts

According to GASB 87, paragraph 19, a contract must be reported as a financed purchase of the underlying asset by the lessee or sale of that asset by the lessor if the contract:

  1. Transfers ownership of the underlying asset to the lessee by the end of the contract
    –and–
  2. Does not contain termination options but may contain a fiscal funding or cancellation clause that is not reasonably certain of being exercised.

For contracts that transfer ownership, at the start of the lease term:

  • A lessee must not recognize a lease liability and an intangible right-to-use lease asset
  • A lessor must not recognize a lease receivable and a deferred inflow of resources

On GASB’s Pronouncements page (in the Implementation Guide category), in GASB’s Implementation Guide No. 2019-3, Leases, under the Contracts That Transfer Ownership section, question 4.21 states:

  • Q—A vendor installs equipment in an agency’s building to increase energy efficiency. The agency will own the equipment at the end of the agreement, and the contract does not contain a termination option. For financial reporting purposes, should this transaction be reported as a lease or a financed purchase?
  • A—This transaction should be reported as a financed purchase. If title to the equipment transfers to the lessee by the end of the contract, the transaction is not accounted for as a lease for financial reporting purposes.

Financing contracts are considered long-term debt (such as Notes and Loans Payable), which are exempt from GASB 87.

For more information, see Note 5 – Long-Term Liabilities and Capital Assets – Sale.