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Lease guidance for schools

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Lease guidance for schools

Introduction

The Council is required to include details of all lease agreements in its audited financial accounts.  Schools are therefore required to complete and submit an annual lease return to the Finance Service Desk by April/May each year.

Leases are classified as either finance leases or operating leases.

Finance Leases: These are effectively the same as borrowing the money to purchase an asset.  The user of the asset has use of it for the majority of its useful life and pays the “owner” substantially all of its cost.  As schools are not allowed to borrow money, they cannot enter into finance leases.

Operating Leases: Leases that are not finance leases are referred to as operating leases.

When entering into a new lease, schools must consider whether the lease is an operating lease (allowed) or a finance lease (not allowed).

Finance Leases

Leases are assessed by applying a series of tests.  In summary, an agreement is a finance lease if, at the start of the agreement, the lessee would reasonably expect to:

  • Have the asset for the majority of its useful economic life, or
  • Make total payments during the expected lease period that are equivalent to all or substantially all of the cost of purchasing the asset.

In applying the tests, it should be noted that:

  • Total payments include any administration or documentation charges
  • The expected lease period continues until there is no penalty or additional payments due if the equipment is returned.
  • The legal ownership of the asset is irrelevant; it is the financial substance of the transaction that is important.

Indicators of an Agreement being a Finance Lease

Good indicators that you are being offered a finance lease include:

  • The leasing company is a bank or is part of bank
  • The leasing company has “finance” in its company or departmental name
  • The leasing agreement is with a different company to the equipments supplier
  • The maintenance/servicing agreement is with a different company to the leasing company.

Beware of the Companies offering leases meeting the “90% Test”

In the past, finance leases were assed as those where the minimum lease payments were more than 90% of the cost of the asset.  Many companies designed their leases to meet this test with the minimum lease payments being 89% of the cost of the asset.  The Regulations now require that “significantly all” of the cost is paid to the lessor rather a fixed percentage.

The 90% test is a red herring – so ignore any claims made by lease companies that agreements are operating leases when they are in fact finance leases!

Good Example of a Finance Lease

Computers and ICT equipment  - these are nearly always finance leases (we have not yet found one that is not a finance lease).  At the end of the lease period, computers and ICT equipment will have little resale value; they have depreciated through use and are becoming obsolete.  Consequently, the payments made to the lease company would have substantially covered the cost of the equipment.

Operating Leases

Good Examples of Operating Lease

Land  - this is always an operating lease as it has an infinite life.

Photocopiers on a three-year lease - Photocopiers have a longer life than computers and do not become obsolete so quickly. At the end of a contract, the supplier will usually refurbish the machine and lease it to another organisation.

Vehicles - Vehicles usually have a life of 7-10 years and will generally have a resale value at the end a three year period.  However if a vehicle was leased for 7 years and 100,000 miles it would have little life remaining and the lessee payments would be substantially all of cost of the vehicle.  In this case, the transaction would be a finance lease.  Hence, as the length of the lease increases the likelihood that the contract is a finance lease increases also.

Contracts that are not Leases

The following contracts are not leases:

  • Utility contracts – gas, electric, water, telephone etc
  • Sanitary bins – the bins have a negligible value, the underlying charge is for the disposal of the waste.

Check List – Indicators of Finance Leases

If the answer to any of these questions is yes, there is a strong likelihood that the agreement may be a finance lease and you should seek advice from the Technical Accounting Section before entering into an agreement

 

Yes /No

The lease is for computer or other ICT equipment

 

You will have the equipment for the majority of its useful life

 

The total payments you expect to make including administration charges are more than 75% of the cost of purchasing the equipment

Note:  You should expect to retain the equipment until there are charges for returning it

 

The leasing company is a bank or is part of a bank

 

The leasing company has “finance” in its company or departmental name

 

The leasing agreement is with a different company to the equipments supplier

 

The maintenance/servicing agreement is with a different company to the leasing company.

 

Definitions

Asset             An item of equipment, building or land.

Lessee          The individual or organisation who uses the asset and makes the lease payments.

Lessor           The company which legally owns the asset and to who the lease payments are made.

Lease             A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Contact Details

Finance Service Desk        01296 382222  financeservicedesk@buckscc.gov.uk

Technical Accounting         Sue Palmer / John Rogers

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