1009.1: Accounting for Leases

Subject Area: Accounting
Responsible Office: Financial Services
Sponsor: Associate Vice President for Finance
Originally Issued: October 1992
Revised: January 2010, February 2021
Refer Questions To: Maru Mendoza, 773-702-3690

Purpose: The University may lease plant or equipment as required by normal operations.

Policy

1. Financial Services is responsible for classifying leases in the year of their origination as either operating or finance leases in accordance with the applicable financial accounting guidance. In order to make these determinations, Financial Services will need the lease agreements. Please send all new lease agreements to leases@lists.uchicago.edu.

2. Financial Services is responsible for accounting for all leases (included leases embedded in other contracts) during the life of the lease in accordance with the applicable financial accounting guidance. Generally, those standards provide that:

For the University as Lessee:

A. Lease payments for leases classified as operating leases shall be recorded as:

1. A right of use asset (ROA) equal to the lease liability, but adjusted for certain items such as prepaid rent or unamortized initial direct costs
   1. The right-of-use asset amortization is calculated as the difference between the lease expense and the interest expense in the period.
2. A lease liability equal to the present value of the lease payments during the life of the lease.
3. Operating lease expense will typically be recognized on a straight-line basis over the term of the lease.
   1. Interest expense on the outstanding lease obligation is calculated using the effective interest rate method.

 B. Leases classified as financing leases shall be recorded as:

1. A right of use asset (ROA) equal to the lease liability, but adjusted for certain items such as prepaid rent or unamortized initial direct costs
   1. The asset is amortized typically on a straight-line basis. 
2. A liability equal to the present value of the lease payments during the life of the lease.
3. Interest expense will be recognized based on the outstanding lease obligation using the effective interest rate method.

3. Leases with lives under one year will be expensed as they are incurred.

4. Equipment leases with annual base rent equal to or greater than $20,000 and space leases with annual base rent equal to or greater than $100K will be analyzed and recorded as stated above. Any lease under these thresholds will be analyzed as a small lease group. The University will be computing an estimated ROU and lease liability by applying certain assumptions that are based on the analysis performed for large lease payments.

C. In order to categorize our leases in a more specific way, the following subaccounts must be used when booking lease expense (See range summary table in a chart form below.):

1. Equipment leases:

1. Base Rent for long term (more than a year) leases 7800-7849
2. Variable rent for long term (more than a year) leases 7850-7899. Includes additional rental fees on top of the base rent – ex. Use fees if you go over the allotted rented hours.
3. Short term leases (a year or less without extension plans) 7900-7949. Short term leases can include base rent and variable rent in this range
4. Internal leases (University owns equipment and leases out to other departments) – 7950-7999

2. Space leases:
   1. Base Rent for long term (more than a year) leases 8000-8049
   2. Variable rent for long term (more than a year) leases 8050-8099. Includes things like common area maintenance, taxes, and utilities.
   3. Short term leases (a year or less without plans to renew the contract) 8100-8149. Short term leases can include base rent and variable rent in this range
   4. Internal leases (One unit renting space to another, but University owns space) – 8151-8196

3. Financial Services Adjustment Accounts:
   1. Finance Lease Contra Account: Account for financial services to move the lease expense out of the 7800-8196 range to interest expense and amortization expense for finance leases – 8197
   2. Lease Foreign Currency Adjustment Account: Account to adjust for foreign currency gain/ loss on our foreign currency leases – 8198.
   3. GAAP Lease Expense: Account for financial services to adjust the actual rent paid to the new expense schedule in order to comply with the GAAP standard ASC 842 – 8199.
4. For any contracts with a term over 1 year that could have embedded leases, consult with financial services to determine if a lease needs to be recorded.
   1. Embedded leases are leases that are contained in larger arrangements.
   2. A contract is, or contains, a lease if it conveys (implicitly or explicitly) the right to control the use of a specified asset (e.g., plant, property, and equipment) over a period in exchange for consideration. It might not contain the word “lease”. For example, a service contract may contain a lease because it gives the right for the customer to use equipment over the life of the agreement.

For the University as Lessor:

1. Starting in FY21, new leases with base rent greater than $100K/ year will have revenue recorded on a straight-line basis over the life of the lease term in accordance with the applicable financial accounting guidance.
2. Any rental income should be booked to the rental income subaccounts listed below starting in FY21.
   1. Base Rent for long term (more than a year) leases 0700-0724
   2. Variable rent for long term (more than a year) leases 0725-0744. Includes things like common area maintenance, taxes, and utilities.
   3. Short term leases (a year or less without plans to renew the contract) 0750-0774. Short term leases can include base rent and variable rent in this rang
   4. Internal leases (One unit renting space to another, but University owns space) – 0775-0799

 All new leases and any rent/ lease related accounting questions should be sent to financial service’s lease team (leases@lists.uchicago.edu).