The California State University
GAAP Reporting Manual
Effective June 2012
SECTION 4-10
CAPITALIZED LEASES
OBJECTIVE OF GAAP ADJUSTMENTS

To record capital lease obligations and lease receivables and their related activity in
conformity with GAAP.
GAAP ACCOUNTING TREATMENT
CAPITALIZED LEASE OBLIGATIONS
For legal basis accounting, the CSU generally treats lease obligations as operating leases.
Accordingly, payments under these leases are recorded as expenses as lease payments are
made. For GAAP reporting purposes, a capital lease obligation liability for future lease
payments should be established if, at its inception, the lease agreement meets one or
more of the following criteria (per FAS 13):
1. By the end of the lease term, ownership of the leased property will be transferred to
the campus at no additional cost;
2. The lease agreement contains a bargain purchase option (e.g., the asset may be
purchased for $1 at the end of the lease term);
3. The lease term is equal to 75% or more of the estimated useful life of the leased
property (e.g., a copier that would typically have a five year life is being leased four
or more years); or
4. At the inception of the lease, the present value of the minimum lease payments totals
90% or more of the fair value of the leased property (e.g., the equipment costs
$100,000 and the present value of minimum lease payment computation yields a
present value of at least $90,000).
A lease that meets one or more of the above criteria is considered to be a purchase of the
leased asset, and the asset should be capitalized, usually for a cost equal to the present
value of the total amount of the future minimum lease payments on the lease. The offset
to the cost of the asset is to be recorded as a liability to capital lease obligations. If the
lease agreement meets criteria 1 or 2 above, the leased asset should be depreciated in
accordance with the campus’ normal capitalization policy and estimated useful life for
that asset category; however if the lease agreement meets criteria 3 or 4 above, the asset
should be depreciated over the term of the lease. The capital lease obligation liability is to
be amortized over the term of the lease. The asset cost is to be recorded in the campus’
legal basis accounting records, while the capital lease obligation liability is typically
recorded and amortized via GAAP adjustments.
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GAAP Reporting Manual
Effective June 2012
Leases that do not meet any of the above criteria are already properly recorded by the
campus as operating leases, and no adjustments are necessary for the GAAP basis
financial statements.
CALCULATION OF PRESENT VALUE OF MINIMUM LEASE PAYMENTS
The following information is necessary for the campus to calculate the present value of
minimum lease payments:
1. Fair value of asset being leased
2. Term of lease
3. Required periodic payments
4. Lessor’s explicit interest rate or the campus’ incremental borrowing rate.
After the determination has been made that a lease qualifies for capitalization, most
campuses might find it easier to record the obligation and the related asset at the quoted
price of the asset, if not materially different than the computed amount. This will
facilitate the adjustments that need to be made as illustrated in the examples below.
However, an amortization schedule will need to be prepared to differentiate between the
principal and interest portions of the monthly payments.
ENTRIES REQUIRED
A review and analysis of all leases and contracts should be performed each year to
identify and record any new capital leases. Capital leases identified and recorded in the
GAAP basis financial records in the prior year will rollforward the asset, liability, and net
asset balances to the subsequent fiscal year. As a result, no GAAP adjustments are
necessary to establish beginning balances.
The adjustments related to the accrual of a new capital lease obligation liability and
annual lease payments are reclassification adjustments. As the campus records the asset
in its legal basis accounting records, adjustments are necessary to reclassify the offset
made directly to Investment in General Fixed Assets, or if using Asset Management, the
reduction of expense, to capital lease obligations on GAAP basis. Likewise as the campus
records capital lease payments as operating expenses in its legal basis accounting records,
adjustments are necessary to reclassify the principal portion as a reduction to the capital
lease obligations’ balance and the interest portion as interest expense on a GAAP basis.
EXAMPLE 1- The campus recorded $400,000 in capital lease obligations in the prior
year GAAP basis financial records. The computation for new capital leases in the current
year resulted in a liability for these new leases at their inception of $50,000. The campus
had recorded the underlying capital assets in its legal basis records, at an original cost
equal to the original amount of the capital lease obligations.
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The California State University
GAAP Reporting Manual
Effective June 2012
Current Year Changes
Invested in Capital Assets, Net of Related Debt (Fund 0997.501)
Debit Net assets: Invested in capital assets, net of related debt,
or Transfer to/from other funds (Asset Management )
$50,000
Credit Capitalized lease obligations
$50,000
(To properly accrue for capital leases on a GAAP basis)
Unrestricted (from Asset Management)
Debit Operating expenses by functional and natural classification $50,000
Credit Transfer to/from other funds
$50,000
(To properly reclassify expense reduction from Asset Management for capital leases on a
GAAP basis)
EXAMPLE 2- The campus made payments for leases that have been determined to be
capital leases totaling $60,000. Of this amount, $40,000 represented principal and
$20,000 represented interest. The payments were made from Unrestricted net assets.
Unrestricted
Debit Interest Expense
$20,000
Debit Transfers to/from other funds
$40,000
Credit Operating expenses by functional and natural classification $60,000
(To properly reclassify capital lease payments made on a legal basis during the year)
Invested in Capital Assets, Net of Related Debt (Fund 0997.501)
Debit Capitalized lease obligation
$40,000
Credit Transfers to/from other funds
$40,000
(To properly reclassify the principal portion of capital lease payments made during the
year on a GAAP basis)
ENERGY LEASE OBLIGATIONS
See discussion of energy lease obligations passed down from the Chancellor’s Office in
Chapter 5, Section 5-4.
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Effective June 2012
ENERGY CONVERSATION FINANCING THROUGH NON-CSU FINANCIAL INSTITUTION
Energy conservation financing through other financing institutions (i.e. Koch) should be
reported as a long term debt. Moreover, the proceeds related to the lease should be
reported as other long term investments (restricted net assets).
FINANCING OF AUXILIARY ORGANIZATIONS PROJECTS
CAPITAL LEASE
ORGANIZATION
TRANSACTIONS
OR
NOTE
AGREEMENT
WITH
AN
AUXILIARY
The Revenue Bond Act of 1947 provides the CSU board of trustees with the ability to
issue revenue bonds to fund specific programs, including the auxiliary organization
facilities. The SRB program is a vehicle for financing these campus/auxiliary projects.
AD 06-06 specifically addresses the SRB program for auxiliary organization debt
refinancing or construction financing.
If you are a participating campus, please refer to the memorandum at:
http://www.calstate.edu/sfo/CodedMemos/coded_memos_2006/AD06-06.pdf
In summary, during the construction phase of the project, the campus carries the asset as
construction work in process (CWIP) and debt on its accounting records, unless
Emerging Issues Task Force No. 97-10 applies (please refer to AD 06-06 for further
discussion). Upon execution of the lease agreement, the auxiliary would record the
capital asset on its accounting records and the related capitalized lease obligation. At that
time, the campus would remove the completed CWIP or asset from its accounting records
and record a lease receivable due from the auxiliary organization.
Effective January 1, 2008, SB 855 authorizes the CSU to loan or advance proceeds from
its revenue bonds or revenue bond anticipation notes to third parties (e.g. auxiliary
organizations) through a loan agreement for projects approved by the Board of Trustees.
The CSU no longer issues a ground and facility lease agreement with the auxiliary
organizations, but rather enters into a loan agreement with the participating auxiliary
organization for financing debt under the revenue bond or revenue bond anticipation
notes program.
In next several pages, examples of GAAP entries of various auxiliary organization
projects are provided.
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GAAP Reporting Manual
Effective June 2012
CAPITAL LEASE
EXAMPLE 1 - For auxiliary organizations projects prior to the SB 855 effective date
1/1/08 when the Emerging Issues Task Force No. 97-10 still applies, campus usually has
established a lease agreement with its auxiliary organization. Campus should record the
following entries:
Campus
Debit CWIP
Credit Long-term debt obligations
(To properly record auxiliary asset during construction phase of project and the revenue
bond)
Debit Leases receivable (from auxiliary organization)
Credit Capital assets, net (CWIP, or other capital asset category depending on
whether the completed project was transferred or not)
(To properly transfer the completed asset upon execution of the lease agreement)
Periodic Principal Payments from the Auxiliary Organizations
Debit Other nonoperating revenue/expense
Credit Lease Receivable
(To properly reclassify the principal payment recorded in legal to lease receivable.
Object code 580098 "auxiliary lease principle payment" is mapped to GAAP account
723006 other nonoperating revenue/expense. Please refer to the legal manual for more
details about the legal accounting entry)
Auxiliary Organization
Debit Capital assets, net
Credit Capitalized lease obligations (to campus)
(To properly record the transfer of completed asset and related debt upon execution of the
lease agreement
NOTE AGREEMENT
EXAMPLE 2 - For auxiliary organization construction projects after the SB 855
effective date 1/1/08, SB 855 applies. Campus is acted as an agency only and manages
the construction for the auxiliary organization. There is no agreement signed between the
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The California State University
GAAP Reporting Manual
Effective June 2012
campus and the auxiliary organization. The loan (note) agreement is actually signed
between the auxiliary organization and the Trustee directly.
Campus
Debit Other long term investment
Credit Other liabilities, noncurrent (to auxiliary organization)
(To properly record SRB bond proceeds and liability to the auxiliary organization)
Debit Fund Balance Clearing
Credit Other long term investment
(Construction expenditures: To properly reclassify fund balance clearing recorded in
legal to investment)
Debit Other liabilities, noncurrent
Credit Expenses
(Construction expenditures: To properly reclassify the construction expenses recorded in
legal to offset other liabilities)
Periodic Principal Payments from the Auxiliary Organizations
(No GAAP entry is required as payments have already recorded and flowed as other
liability in the campus book in legal. Object code 250002 "unclear collection" is mapped
to GAAP account 712109. Please refer to the legal manual for more details about the
legal accounting entry)
Auxiliary Organization
Debit Receivables, noncurrent (from campus)
Credit LT-debt obligations
(To properly record receivables from campus and SRB bond obligation)
Debit Capital assets, net (CWIP, or other capital asset category depending on whether
the completed project was transferred or not)
Credit Receivables, noncurrent (from campus)
(To properly record the transfer of completed asset from campus)
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The California State University
GAAP Reporting Manual
Effective June 2012
EXAMPLE 3 - For auxiliary organization refunding projects after the SB 855 effective
date 1/1/08, SB 855 applies. Campus is acted as an agency only. There is no agreement
signed between the campus and the auxiliary organization. The loan (note) agreement is
actually signed between the auxiliary organization and the Trustee directly.
Campus
(No GAAP entry is required. Only debt services payments from the auxiliary
organization will pass through campus. No GAAP entry is required because debt
services payments have already recorded and flowed as other liability in the campus book
in legal; Object code 250002 "unclear collection" is mapped to GAAP account 712109,
Please refer to the legal manual for more details about the legal accounting entry)
Auxiliary Organization
Debit LT-debt obligations (Old debt)
Debit / Credit Loss on refunding, net premium / discount
Credit LT-debt obligations
(To properly record refunding of old debt and establish the new debt)
EXAMPLE 4 - For auxiliary organization purchase projects after the SB 855 effective
date 1/1/08, SB 855 applies. Campus is acted as an agency only. There is no agreement
signed between the campus and the auxiliary organization. The loan (note) agreement is
actually signed between the auxiliary organization and the Trustee directly.
Campus
(No GAAP entry is required. Only debt services payments from the auxiliary
organization will pass through campus. No GAAP entry is required because debt
services payments have already recorded and flowed as other liability in the campus book
in legal; Object code 250002 "unclear collection" is mapped to GAAP account 712109,
Please refer to the legal manual for more details about the legal accounting entry)
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GAAP Reporting Manual
Effective June 2012
Auxiliary Organization
Debit Capital asset
Debit / Credit net premium / discount
Credit LT-debt obligations
(To properly record purchase of capital asset and establish the debt obligation)
The Chancellor’s Office will provide passdown entries for campuses and their auxiliary
organizations who involved in Systemwide Revenue Bonds financing.
The above
examples are simplified in the GAAP manual. Actual transactions in the passdown
entries are more complicated and required more thoughtful communications between the
campus, the auxiliary organization and the Chancellor’s Office. The file below consists
of actual transactions relevant to the example 2, 3 and 4 above in the passdown entries
(including a sample of refunding, purchase and construction programs):
LB example
2008A.xls
If the campus is a party to such a transaction, the campus should contact the auxiliary
organization as soon as possible to verify that both parties are properly recording the
transaction. Additionally, the campus and the auxiliary organization must also consult
with the Chancellor’s Office, the independent auditors of the auxiliary organization, and
the independent auditors of the campus in order to determine 1) the proper accounting
treatment for the transaction and 2) consistency in accounting treatment within the CSU
as a whole.
Note that in certain situations, the total construction costs of the asset may ultimately be
more or less than the SRB issuance amount. In these situations, the campus and the
related auxiliary organization would need to come to agreement on how to handle the
resulting “excess” or “shortfall” and consider this aspect in determining the proper
accounting treatment
In addition to construction, the auxiliary organization is able to participate in the
refunding of its senior bonds through the Systemwide Revenue Bonds, also discussed in
AD 06-06.
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