CAPITAL AND OPERATING LEASES - fasab.gov

1 CAPITAL AND OPERATING LEASES A RESEARCH REPORT Prepared by Susan S. K. Lee Federal Accounting Standards Advisory Board October 2003 NOTE: This report was prepared by Ms. Susan S. K. Lee, Special Assistant at the Federal Aviation Administration while on assignment with FASAB. This material is presented for discussion purposes only; it is not intended to reflect authoritative views of the FASAB or its Staff. Official positions of the FASAB are determined only after extensive due process and deliberations. 2 About the Author SUSAN S.

2 K. LEE Susan Lee has worked at the Federal Aviation Administration since 1991, serving as the Special Assistant to the Chief Financial Officer and later the Special Projects Officer to the Director, Office of Financial Management. In these roles she has worked on both accounting and budget matters and represented the CFO and the Director of Financial Management in meetings and various task groups. Recently, Susan was the audit liaison for the financial statements audit and directed the preparation of FAA s Performance and Accountability Report and supplemental Highlights document.

3 Previous to the FAA, Susan worked at the National Archives and Records Administration as the agency s Director of Accounting and Director of Budget. She worked for the Treasury Department for 16 years, where she was the Director of the Federal Financial Systems Program, in charge of a staff who worked with the Office of Management and Budget (OMB) and the 23 largest Federal agencies to provide policy direction and to oversee agencies progress in improving their financial systems. She served as Treasury s Fiscal Service representative on the Chief Financial Officers Council, the CFO Subcommittee on Financial Systems and Information Needs, and the Systems Committee of the President s Council on Management Improvement.

4 She also worked at the Office of Management and Budget for two years, during which she drafted OMB Bulletin No. 83-21, which was OMB s directive on using credit bureaus for debt collection, and led a government-wide task force to implement provisions of the Debt Collection Act. An active supporter of the Association of Government Accountants (AGA), Susan has been the President of the Washington Chapter, National Treasurer, Regional Vice President, National Executive Committee member, and a permanent member of the AGA National Board of Directors. She was elected three times to be on the Board of Directors of the American Association of Budget and Program Analysis, and served as their Vice President for Membership and Vice president for Communications.

5 She has been a member of the Brookings Institute Accountants Roundtable and was Programs Chair for the Comptrollers Roundtable. When AGA established the Certified Government Financial Manager (CGFM) designation, Susan was a subject matter expert who helped AGA to develop the knowledge requirements and the training materials used to prepare individuals for the professional examination. She graduated from the University of Maryland in 1976 and was a Certified Public Accountant from 1994 to 2002. 3 TABLE OF CONTENTS TABLE OF CONTENTS .. 3 6 Purpose and 6 6 Background.

6 7 What is a lease ?.. 8 What is covered in FASAB guidance on LEASES ?.. 8 How is FASAB guidance different from others?.. 8 Classifications of LEASES .. 9 CAPITAL 10 Sales-Type lease , Direct Financing lease , and Leveraged lease .. 12 OPERATING lease .. 13 How does the lessee report and account for LEASES ? .. 13 CAPITAL 13 OPERATING lease .. 14 How does the lessor report and account for LEASES ? .. 15 What other lease accounting guidance is provided by other standard-setting entities but not covered by FASAB? .. 16 LEASES Involving Real Estate .. 16 LEASES Between Related Parties.

7 17 Sale-leaseback Transactions .. 17 Subleases and Similar Transactions .. 19 LEASES in a Business Combination .. 19 Fiscal Clauses .. 19 USE OF LEASES BY FEDERAL ENTITIES .. 21 Types of LEASES and lease -Like Arrangements .. 22 OPERATING 23 Patent and Trademark Office (PTO) 23 Department of Transportation Headquarters Building .. 23 Boeing 767 Tankers .. 23 Sale-Leaseback .. 24 Charlestown, WV, Federal 24 lease -Leaseback .. 24 Public-Private Partnerships .. 25 4 Veterans Affairs - Houston Regional Office 26 Veterans Affairs - Office Collocation and Parking Garage, 26 Oak Ridge National 27 Outleases.

8 27 Galveston 27 Maine Lights Program .. 27 Tariff Building .. 28 Share-in-Savings 28 Eisenhower Center .. 28 Heating, Ventilation and Air Conditioning System Upgrade - Commerce .. 28 Special-Purpose Public/Private 28 DOD s Military Housing .. 29 Other Public/Private Ventures .. 30 Statutory Authority .. 30 Public Private Partnership Act of 31 Federal Property Asset Management Report Act of 2003 .. 31 RELEVANT ISSUES RELATING TO lease ACCOUNTING .. 33 Department of Justice s Specific Concerns .. 33 Global 34 With the growing use of OPERATING LEASES to meet long-term commitments, should the accounting, and reporting of such LEASES be revised?

9 34 How do you determine whether an arrangement is a lease ? .. 36 In a public/private venture, should the special-purpose entity that is essentially established and controlled by the Federal agency, be consolidated into an agency s financial statements? .. 37 Should Federal agencies disclose information on OPERATING LEASES with cancellation clauses? Do they? .. 39 Does FASAB need to provide additional guidance on LEASES ? .. 39 NEXT STEPS .. 42 Prepare Staff Position Paper .. 42 Expand FASAB Guidance on LEASES .. 42 Monitor 42 Further 42 Establish a Network of Agency Contacts.

10 43 CONCLUSION .. 43 APPENDIX NO. 1: CAPITAL AND OPERATING LEASES AND LEASEHOLD IMPROVEMENTS SKELETON PROJECT PLAN RESEARCH PHASE .. 46 APPENDIX NO. 2: LIST OF AUTHORITATIVE LITERATURE .. 47 5 APPENDIX NO. 3: LIST OF 49 APPENDIX NO. 4: COMPARISON OF CRITERIA FOR CLASSIFYING A lease AS A CAPITAL lease .. 50 APPENDIX NO. 5: DETERMINING LESSOR S TYPE OF lease 53 APPENDIX 6: FOOTNOTE DISCLOSURE: EXTRACT FROM OMB BULLETIN NO. 01-09 .. 54 APPENDIX NO. 7: ACCOUNTING FOR A CAPITAL lease BY A 57 APPENDIX 8: ILLUSTRATIVE CAPITAL lease SCENARIO .. 58 APPENDIX NO.