Accounting Policies (APPR16)

OVERVIEW

This procedure provides guidance in the leasing or financing of equipment. For all equipment transactions falling under the guidelines of this procedure, the requesting departments must work with the Controller's Office and Purchasing to determine if leasing vs. purchasing is most appropriate. In situations in which purchasing is the appropriate means to acquire the equipment, this group must then review the current budget situation to determine if financing should be considered vs. a direct purchase.

REQUIRED FORM(S)

Purchase Requisition

PROCESSING STEPS

Financing of Equipment more than $15,000 and less than $25,000

If the above mentioned discussions determine that financing the equipment vs. direct purchase is appropriate due to budget constraints, the steps below should be followed:

1. Purchasing communicates with the designated lending institution to coordinate the necessary administration to use the pool of funds as well as to identify the entire financial commitment.
2. The requesting department establishes a purchase requisition using account code 7939 for the entire cost of the purchase (equipment cost plus financing), noting in text that it is intended for financing through the designated lending institution pool. By having the total cost in the requisition, the total commitment of the University is approved through the requisition. It is understood that this process may cause the requisition to exceed available budget, but it will be allowed as long as the current year payments are within budget.
3. From the approved requisition, Purchasing will create two purchase orders in the financial system. One is to the designated lending institution to establish the requesting department's encumbrance for the current year's monthly payments. (This purchase order is for internal purposes only and is not physically sent to the designated lending institution.) The account code used for this purchase order is 7939, Financed Equipment. The second purchase order is sent to the equipment vendor for the purchase of the equipment (actual cost excluding financing). The second purchase order is set up in the Plant Fund in account 1588, Clearing Equipment.
4. The designated lending institution will send a check for the purchase price of the equipment to Creighton University, which will be deposited in a liability account within the Plant Fund 2305.
5. The University will pay the equipment vendor directly using the funds received in 4. above.
6. Annually, the Controller's Office will make a reclassification entry moving departmental expense from 7939 to 7366 based upon the amortization schedule received from the designated lending institution. This entry is to properly recognize the interest component of the payments to the designated lending institution.
7. Annually, the Controller's Office will make an entry to reduce the loan and offset account 7939 in the Plant Fund based upon the amortization schedule. This will properly net account 7939 to $0 when consolidating the Current Funds with the Plant Fund.

Purchasing of Equipment more than $25,000

If the above mentioned discussions determine that equipment with a cost of >$25,000 should be financed due to budget constraints, the steps below should be followed:

1. If the financed purchase is directly through the equipment vendor, the requesting department establishes a purchase requisition using account code 7939 for the entire cost of the equipment (equipment cost plus financing). By having the total cost in the requisition, the total commitment of the University is approved through the requisition. It is understood that this process may cause the requisition to exceed available budget, but it will be allowed as long as the current year payments are within budget. The general terms of the financing must be included in the text of the requisition. These terms should include at least the financing term, the equipment cost net of financing, the financing rate and the total cost of equipment, including financing.
2. Purchasing will create a purchase order for only the current year's payments on the financing to establish the requesting department's encumbrance. (This purchase order is for internal purposes only and is not physically sent to the vendor.)
3. Upon receipt of the equipment, the Controller's Office will make an entry to record the net cost of the equipment in account code 1588 in the Plant Fund as well as an offsetting liability in the Plant Fund 2305.
4. Annually, the Controller's Office will make an entry moving departmental expense from 7939 to 7366 based upon the amortization schedule received from the vendor. This entry is to properly recognize the interest component of the monthly payments.
5. Annually, the Controller's Office will make an entry to reduce the loan and offset account 7939 in the Plant Fund. This will properly net account 7939 to $0 when consolidating the Current Funds with the Plant Fund.
6. If the financed purchase is through a source other than the equipment vendor, the same procedures will be followed as described above in the designated lending institution Pool, only using the applicable financing source instead of the designated lending institution.

Leasing of Equipment

Leasing of equipment is only appropriate when the cost of the equipment is more than $15,000, as stated in APPL 11. If the above mentioned discussions determine that leasing is the appropriate means of acquiring the equipment, a determination must also be made as to whether the transaction is an operating or capital lease. This decision has a direct impact on how to account for the transaction. The primary accounting difference between the two is that an operating lease is treated as operating expense while a capital lease is treated as though the University has purchased the equipment. Following are the key determining factors to distinguish between an operating and capital lease:

Does the lease transfer ownership of the equipment?

Does the lease have a bargain purchase option?

Is the lease term more than 75% of the useful life of the equipment?

Is the present value of the lease payments more than 90% of the equipment's fair value?

If the answer to any one of the above questions is yes, the transaction must be treated as a capital lease for accounting purposes.

If the transaction is determined to be an operating lease, the requesting department will establish a purchase requisition using account 7202 for the current year's payments. The department must include information about the total cost of the equipment over the entire lease term in the text of the requisition.

If the transaction is determined to be a capital lease, the steps below should be followed:

1. The requesting department establishes a purchase requisition using account code 7939 for the entire cost of the equipment (equipment cost plus financing). By having the total cost in the requisition, the total commitment of the University is approved through the requisition. It is understood that this process may cause the requisition to exceed available budget, but it will be allowed as long as the current year payments are within budget. The department must include the general lease terms in the text of the requisition, specifically the terms that determined that it was a capital lease.
2. Upon receipt of the equipment, the Controller's Office will make an entry to record the net cost of the equipment in account code 1588, Equipment Clearing, in the Plant Fund as well as an offsetting liability in the Plant Fund 2305.
3. Annually, the Controller's Office will make an entry moving departmental expense from 7939 to 7366 based upon the amortization schedule. This entry is to properly recognize the interest component of the monthly payments.
4. Annually, the Controller's Office will make an entry to reduce the loan 2305 and offset account 7939 in the Plant Fund. This will properly net account 7939 to $0 when consolidating the Current Funds with the Plant Fund.

Tagging of Financed and Leased Equipment

All financed equipment will be tagged similar to directly purchased equipment. Any equipment acquired with a capital lease will be tagged at the time the capital lease agreement is signed. Any equipment leased with account code 7202 will not be tagged.