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5.19.2 Purchasing: Equipment Under Capital Lease Agreements Policy Objective

To provide policies and procedures on purchasing equipment under capital lease agreements for the University of Tennessee Foundation (UTFI). Purchasing Equipment Under Capital Lease Agreements

  1. This policy governs the acquisition of equipment through installment purchases or capital lease agreements. The Financial Accounting Standards Board has issued guidelines to clearly define the accounting treatment for such transactions. Those guidelines are reflected in this policy.
  2. Lease Classification. A lease can be classified either as a capital lease or an operating lease. When a lease meets any of the following criteria, it should be classified as a capital lease (installment purchase), and a corresponding asset and liability must be recorded on UTFI records:
    1. Property Ownership. The lease transfers ownership of the property to UTFI by the end of the lease term.
    2. Purchase Option. The lease contains an option to purchase the leased property at a bargain price (significantly lower than the property’s fair value when the option is exercised).
    3. Lease Term. The lease term equals or exceeds 75 percent of the estimated economic life of the leased property.
    4. Rental Payments. The present value of rental payments equals or exceeds 90 percent of the value of the leased property.

If none of these criteria are met, the lease is classified as an operating lease. Neither an asset nor a liability is recorded on UTFI records.

  1. Required Accounting. Equipment obtained on installment or capital lease agreements should be capitalized (and tagged) and the corresponding liability recorded on official UTFI records.
  2. Required Contracts. Purchase orders may not be issued to acquire equipment under an installment or capital lease. Instead, separate installment or capital lease contracts must be completed. These contracts should reflect all pertinent facts and conditions, including provisions or outright purchase of the equipment during the lease term and amortization schedules for the equipment under contract. Procedures

The responsibilities for installment and capital lease contracts are as follows:

  1. Contract.
    1. Terms. UTFI is responsible for securing the most favorable terms whether through an operating lease or a capital lease agreement.
    2. Quotations. The quotations received should include an outright purchase quote as well as lease options.
    3. Review Process. The installment and capital lease contracts will be reviewed by the UTFI Contracts and Purchasing Coordinator. These contracts should include amortization schedules and the rate of interest (implicit or stated).
  2. Accounting Entries. The Controller (or designee) will prepare journal vouchers scheduling the installments or leaseholds payable and capitalizing the purchased equipment. Each year end, the installments/leaseholds payable are reduced by the amount of the principal paid during the year under the installment purchase or capital lease contracts.
    1. Invoice Processing.  An invoice will be processed for payment for each installment or lease payment due.  The invoice must show both principal and interest portions of each payment

June 1, 2021