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Rental and Lease of Equipment

From Appalachian State University Policy Manual

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Policy 509.15

Contents

1 Introduction

1.1 This policy addresses acquisition of equipment through rental or lease, as an alternative to the generally preferred option of purchasing. These procedures must be followed in order to pursue these options.

2 Scope

2.1 This policy applies to all campus personnel who are involved in the purchasing function, including departmental personnel. Section 4.3 is an accounting function that applies to the Purchasing area and the Controller’s area, which includes the fixed assets accounting area.

3 Definitions

4 Policy and Procedure Statements

4.1 Necessary Bidding and Approval

4.1.1 The purchase of equipment is encouraged, in lieu of leasing or rental when feasible. Departmental requests to lease equipment are submitted to the Purchasing Office on a procurement request. The request should be accompanied by a memorandum explaining the need for leasing rather than purchasing, a copy of the leasing agreement, and any other communication available concerning the request. The Purchasing office will forward the procurement request and other material to the State Purchase and Contract Division for review.

4.2 Lease/Purchase Agreements

4.2.1 Lease agreements are for a definite period of time, usually one to three years, and cannot be canceled during the life of the lease. However, a lease may be entered into with the option to purchase the equipment during the life of the leased or at the end of the lease period. If it is determined that the leased equipment will be needed on a continuing basis, it is usually more economical to exercise the option to purchase, provided funds are available to make the purchase.

4.3 Capital Lease Policy

4.3.1 The Financial Accounting Standards Board has ruled that a lease should be treated as a capital lease if it meets any one of the following four conditions:

  1. if the lease life exceeds 75% of the life of the asset
  2. if there is a transfer of ownership to the lessee at the end of the lease term
  3. if there is an option to purchase the asset at a “bargain price” at the end of the lease term
  4. if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset.

4.3.2 The Director of Materials Management reviews all appropriate equipment leases and determines whether each lease is an operating or capital lease based on the above criteria. If determined to be a capital lease, or if the type of lease is in question for any reason, the lease information is forwarded to the Fixed Assets Accountant for review. Both the Fixed Asset Accountant and the University Controller review the lease to confirm it is a capital lease. If it is determined that it does qualify as a capital lease and the equipment item meets the threshold requirements for fixed assets, the equipment is capitalized by journal entry.

4.4 Rental Agreements

4.4.1 Rental requests should be submitted to the Purchasing Department on a procurement request with an explanation justifying the need for the rental, a copy of the rental agreement, and any other communication concerning the request. The Purchasing Office will forward this material to the State Purchase and Contract Division for review and action.

4.5 Reasons for Renting

4.5.1 It may be desirable to rent equipment for a short duration for a specific requirement. Rental agreements are similar to lease agreements, except that rental agreements are normally for an indefinite period and can be terminated by the rentee after giving notice, usually thirty days in advance. The initial cost of some equipment, such as computers, is so great that when this type of equipment is required, it may be more economical to rent on a continuing but indefinite basis. Also, new, updated versions of this type of equipment are constantly placed on the market, making it unwise to invest large sums in equipment which may soon be obsolete.

5 Additional References

6 Authority

7 Contact Information

8 Effective Date

9 Revision Dates

February 17, 2012