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Equipment Lease Definitions
Summary: Learn about the various types of equipment leases, and trade-ins.
A lease is a contract between the University and a Supplier that contains the essential terms and conditions for the use (not purchase) of property in exchange for scheduled payments of a specific amount over a specified term. Title of the equipment remains with the Supplier. Equipment is returned to the Supplier at the end of the term of the contract.
Typically, a lease is more expensive than purchasing or lease-purchasing equipment. Only choose a lease if the equipment is needed for a limited period of time and you do not ever want to own the equipment.
For the University an operating lease must be valued for an amount less than $100,000 and coded with the Account Code 006135 (non-computer) or 006155 (computer). An operating lease is also known as an installment purchase because the payment for the equipment is financed over an agreed upon term - usually from 36-60 months.
A capital lease is valued at $100,000 or more. More difficult criteria must be evaluated in consultation with Plant Accounting to accurately determine this classification and the use of Account Code 006130 (non-computer equipment) and 006150 (computer equipment). Equipment acquired under a capital lease is inventoried and tagged at the inception of the contract.
A capital lease must have one of the following characteristics:
Lease with No Purchase Option
A lease with no purchase option does not include an option to purchase the equipment for a specified amount upon termination of the lease. Title remains with the lessor. No principle or interest components apply to payments.
Lease with Purchase Option
A lease with purchase option includes an option to purchase the equipment for a specified amount upon termination of the lease. If this option is exercised, title then transfers to the University. Payments include principle and interest components. This is not the same type of contract as a Lease-Purchase (installment purchase).
Lease-Purchases of Equipment (Installment Purchases)
A lease-purchase (also called an installment purchase) is a contract executed by the University and another party containing all terms and conditions for acquisition of property by means of scheduled installment payments of specified amounts of money during the life of the contract. Conditional title to the equipment vests in UC upon receipt of the equipment. The equipment is inventoried at inception of the contract.
A lease-purchase or installment purchase differs from a lease. With a lease-purchase, the intent is to purchase equipment, and UC is committed over the term of the contract. Even if the contract states that it is cancellable in the event of loss of funding, it is considered non-cancellable. The assumption is that UC has in good faith set sufficient funds aside in order to enter into the contract. Third-parties may provide the financing.
Leases valued at less than $5,000 are considered operating expenses and should not be financed.
A trade-in is the simultaneous exchange of equipment to which UC holds title, for equipment to which UC will hold title. It provides a financial advantage toward the acquisition of the new equipment. Acquisition of the new equipment may be a direct purchase or financed via a Lease Purchase.
Last revised: September 30, 2009 (am)