5230 Capital Leases

Other than an operating lease, a transit agency may also have a capital lease. A lease is considered a capital lease if it meets any of the following four criteria at its inception (the earlier of the date of the lease agreement or commitment):

1. Transfer of ownership: the lease transfers ownership (e.g., transfer of title) of the property to the transit agency by the end of the agreed-upon lease term.
2. Bargain purchase option: the lease contains a provision that allows the transit agency to purchase the leased property for a reduced price (reduced compared to expected fair value of the property at the date that the purchase option becomes exercisable).
3. Lease term: lease term is equal to or greater than 75% of the estimated useful life of the leased property. However, if the beginning of the lease term falls within the last 25% of the total estimated useful life of the leased property, this criterion cannot be used for classifying the lease as a capital lease.
4. Minimum lease payments: the present value at the beginning of the lease term of the minimum lease payments to be paid by the transit agency, excluding executory costs such as insurance, maintenance, and taxes, is equal to or greater than 90% of the fair value of the property at lease inception.

The agency reports the current portion of capital leases in operating expenses for the reporting period. The current portion of capital leases includes lease payments made for capital leases during the reporting period. The noncurrent portion of capital leases is capitalized and reported as Capital Lease Obligations (2230).