DRAFT
Ministry of (XXX)
BRIEFING DOCUMENT
To:
DATE REQUESTED:
DATE REQUIRED:
DATE PREPARED:
DATE AMENDED:
Initiated
by:
Phone :
E-mail:
Ministry
contact:
Phone :
E-mail:
REF #:
TITLE: ([Project Name/Entity] Lease Classification For Accounting Purposes.)
PURPOSE:
(X) INFORMATION
COMMENTS:
The (ministry/branch) was asked by (XXX) to evaluate preliminary lease proposal
documents for (project name/entity).
This note addresses the application of the Canadian Institute of Chartered Accountants
(CICA) recommendation and the Public Sector Accounting Board (PSAB) accounting
policy guideline to the proposed lease in order to classify it as a capital lease or an
operating lease.
A final classification of the lease cannot be made until the signed lease document and
related memorandum of understanding are available.
Briefing Document
Page 2
Date (Prepared/Amended):
TITLE:
([Project Name/Entity] Lease Classification For Accounting Purposes.)
ISSUE:
Is the proposed lease for (project name/entity) an operating or capital
lease?
BACKGROUND:
 This note does not address the economics or business case of the proposal, nor
does it address whether or not a capital lease would be reported as a prepaid capital
advance.

Key points of the Memorandum of Understanding:
 (list)
A list of more detailed particulars of the proposed agreement is attached as
Appendix A.

The material provided is in draft form and is currently under revision (unless signed
documents are available).
DISCUSSION:
1. Under CICA private sector recommendations:


The proposed lease (does/does not) meet (at least one of /any of) the three tests
for a capital lease, (section 3065). In addition, a significant balance of the risks
and responsibilities of ownership rest with the (lessee/lessor); therefore, the
lease (may/may not) be considered (a capital/an operating) lease, from the point
of view of the lessee (Appendix B).
The proposed lease (does/does not) involve land. Lease of land must be
reported as an operating lease.
2. Under PSAB draft guidelines:

The proposed lease meets (none/one/two/all) of the three CICA private sector
key tests. (Less than/Substantially,) all of the risks and benefits of ownership
remain with the (lessee/lessor).
3. The remainder of the PSAB guidelines concerning the substance of the risks and
benefits of ownership (Appendix C) and an additional analysis of the substance of
the transaction (Appendix D) support the classification of the lease as
(capital/operating).
CONCLUSION:
Based on information available, a preliminary evaluation by the (ministry/branch)
indicates that:

Private sector tests permit the proposed lease to be classified as (a capital/an
operating) lease.
Briefing Document

Page 3
Proposed public sector accounting guidelines and an analysis of the substance of
the transaction (also) indicate that the proposed lease may be classified as (capital/
operating).
APPENDIX A
Significant Factors:
(List particulars of lease.)
APPENDIX B
Classification based on an analysis of CICA section 3065.
From a lessee’s perspective, the proposed lease meets (number) of the test conditions
described in CICA section 3065 that require classification as a capital lease.
This section states that a transfer of substantially all the risks and benefits of ownership
to the lessee occurs when, at the beginning of the lease, one or more of the following
conditions exist:

There is reasonable assurance that the lessee will obtain ownership by the end of
the lease when the terms result in ownership transfer, or there is a bargain
purchase option.

The lease term is major portion (usually 75% or more) of the asset’s economic life.

The present value of the minimum lease payments is substantially all (usually 90%
or more) of the cost, or fair value at inception.
Technically, in the CICA handbook recommendation, even if the lease does not meet
any of the three tests, if the lease transfers substantially all of the benefits and risks of
ownership to the lessee, the transaction should be accounted for as an acquisition of an
asset and an incurrence of an obligation by the lessee; i.e., a capital lease.
However, the practice for the private sector in the application of section 3065 is that if
the lease does not meet at least one of the three numerical tests, it is considered an
operating lease.
Leases of Land
It should be noted that leases of land are always reported as operating leases unless
there is reasonable assurance of ownership transfer to the lessee. Even if the present
value of the minimum lease payments is substantially all of the cost or fair value,
ownership must transfer to the lessee to be considered a capital lease.
CICA Section 3065.71-.73 deals with leases that involve land and buildings.
APPENDIX C
PSAB Guidelines for Leased Tangible Capital Assets (PSG-2)
The PSAB public sector guidelines indicate that a capital lease is present if one or more of the following three conditions
are present. (The three CICA section 3065 conditions are included in the guideline.)
Risks and
Benefits of
Ownership
Factor
Ownership
Reasonable
assurance of
ownership by
end of lease
term (CICA
section
3065.06 (a))
Duration
Lease term
compared to
economic life
(CICA section
3065.06(b))
Explanation and Comments
The terms of the lease result in ownership being transferred
to the lessee by the end of the lease term or when the lease
provides for a bargain purchase option.
If the lease term is equal to a major portion (usually 75% or
more) of the asset's economic life, the lessee will receive
substantially all of the economic benefits to be derived from
use of the property.
Investment Recovery
Recovery of
If the present value of the minimum lease payments is equal
Investment
to substantially all (usually 90% or more) of the asset cost
(CICA section
(fair value at inception), this would indicate that the lessor
3065)
would recover the investment in the asset and earn a return.
Risks and
Benefits
Transferred to:
(YES)
(NO)
Lessee Lessor
Indication of lease
type from lessee
perspective
(YES)
(NO)
Capital Operating
PSAB Guideline PSG-2:
PSAB's guideline states that if the preceding tests are not met, it does not necessarily mean that the lease is not a tangible
capital asset, and the following criteria should also be considered in determining if “substantially all of the benefits and risks”
of ownership are transferred to the lessee.
Risks and
Benefits of
Ownership
Factor
Explanation and Comments
(a) Ownership of the asset
Essential
Is there no alternative use for the asset other than that for
Service or
which the government is using it?
Specialized
Asset
Would the conversion of the asset to other use require a
significant outlay?
(b) Financing Risk
Financing
Is the government providing transfers, loans or loan
assistance
guarantees? A transfer may include assets other than
financial assets.
(c) Control of the Asset
Idle Capacity
Does the government have a degree of control over the idle
capacity or use of the asset? If so, it is indicative of a benefit
of asset ownership.
(d) Residual Risk
Land
Where the leased asset cannot be easily moved, does the
ownership
government own or retain control of the land on which the
leased asset is located?
Sub-lessee or
Under the terms of the agreement, is the government obliged
Penalties to
to either find a sub-lessee or pay significant costs to the
exit agreement lessor in order to exit the agreement?
Risks and
Benefits
Transferred to:
Indication of lease
type from lessee
perspective
(YES )
(NO)
(YES )
(NO)
Lessee
Lessor
Capital
Operating
Risks and
Benefits of
Ownership
Factor
Explanation and Comments
(d) Residual Risk, continued
Transfer of
Does the lessor and/or the financing institution have the
asset and/or
option, at the end of the lease, to transfer the leased asset
related
and any related obligation to the government?
obligation
Residual
Does the government (as lessee) share in the residual loss
Loss/Gain
or gain on the leased property?
(e) Operating risk
Performance/
Are there significant penalties to the lessee (or insignificant
Availability
penalties to the lessor) if the asset is not available due to
lessor fault?
Maintenance
Are there significant penalties to the lessee (or insignificant
responsibility
penalties to the lessor) if the asset is not maintained to a
specific standard?
(f) Business Risk
Future Cost
According to the lease agreement, will payments fluctuate
Increases
with specific indices such as interest rates or the Consumer
Price Index?
Are there other significant cost increases that are to be
passed on to the government?
(g) Construction Risk
Cost overruns
Does the government bear the financial implications of cost
or financing of
and time overruns during the construction period?
construction
Warranty
Is the government responsible for subsequent warranty
repairs
repairs?
Risks and
Benefits
Transferred to:
Indication of lease
type from lessee
perspective
(YES )
(NO)
(YES )
(NO)
Lessee
Lessor
Capital
Operating
Risks and
Benefits of
Ownership
Factor
Explanation and Comments
(h) Demand Risk
Obligation to
Is the lessee required to pay for unused capacity (e.g.,
pay for
building space)?
capacity
whether or not
it is needed.
(i) Other Risks
Obsolescence
Environmental
Liability
Uninsured
damage or
Condemnation
of Asset
Restrictions or
implied terms
Is the risk of obsolescence significant and the duration of the
lease such that the asset may be obsolete or technologically
outdated by the end of the term?
Does the responsibility to correct pollution deficiencies
required by law or responsibility for other environmental
damage or protection rest with the lessee?
Is the lessee responsible in the case of uninsured damage or
condemnation of the asset?
Expectations of parties: Are there motives for perhaps
agreeing to a form that may not reflect the transaction?
Risks and
Benefits
Transferred to:
Indication of lease
type from lessee
perspective
(YES )
(NO)
(YES )
(NO)
Lessee
Lessor
Capital
Operating
APPENDIX D
Other Business Risks
There are other business risks and benefits, which, if substantially transferred to the lessee, would indicate a transfer of
ownership.
Risks and
Benefits of
Ownership
Factor
Indemnity risk
Insurance risk
Termination
Clause
Transaction
completion risk
Financing
Liquidity risk
Exchange risk
Risks and Benefits
Transferred to:
Explanation and Comments
Are there some blanket indemnities of the landlord/lessor
by the government (as lessee) that survive the lease term
and renewals; e.g., environment, general blanket
indemnity, limitations of landlord/lessor liability?
Is the government/lessee responsible for various insurable
coverage including “all risks”, vehicles, public liability, public
damage and other coverage including any excess costs
incurred by the lessor? The cost of insurance would
indicate ownership.
Is the government as lessee unable to terminate the lease
under any circumstances?
Is the builder able to complete construction of the asset on
schedule and is the lessee/government not required to pay
rent? If no, the risks are with the lessor.
Ownership is implied if the lessee/government suffers the
consequences.
Is the lessee/government providing a lease in advance so
that financing can be available to complete construction?
Is there foreign currency exchange risk to the lessee/
government?
Indication of lease
type from lessee
perspective
(YES)
(NO)
(YES)
(NO)
Lessee
Lessor
Capital
Operating
Risks and
Benefits of
Ownership
Factor
Risks and Benefits
Transferred to:
Explanation and Comments
Renewal term
benefit
Is the lessee/government obligated in the agreement such
that it cannot abandon the lease at the end of the lease
term or any renewal term?
Purchase
Could there be liens remaining on the asset at lease end?
option risk –
The lessee/government assumes risks if the purchase
liens
option is exercised and there are liens on the asset.
[Relates to (c) in Appendix C.]
Financing risk
Is the lessee/government responsible for development
financing, as well as debt and equity financing costs?
Long-term debt Is the lease term similar to the term for long-term
financing
financing?
inferred
Rezoning risk
Is there a risk that a property may or may not be rezoned
for intended use, posing a financial problem for the lessee/
government?
Miscellaneous
Are there risks to tenant/lessee/government arising from
use risks
signs, rubbish, garbage and nuisances.
Other Factors
Tax risk
Does the lessee/government risk future changes in taxes?
Political risk
Are there are political or public relations risks to the lessee/
government?
Indication of lease
type from lessee
perspective
(YES)
(NO)
(YES)
(NO)
Lessee
Lessor
Capital
Operating