FMPM 471 Procedure - Leases (Excluding Real Property)

Intent

This procedure sets out the requirements for the application, appraisal, and entering into any lease of a leasing facility.

Definition

Lease

Lease Custodian

Real Property

Scope

This procedure only applies to plant and equipment leases entered into by the University.  Excluded from this procedure are:

• Leases that form part of a personal employment or salary packaging arrangement; and

• Real property leases.

Procedure

The University meets its obligation under the Leasing in the Queensland Public Sector – Policy Guidelines, by adopting the following procedures.

Items with an outright purchase cost of $200,000 or less. The University will not enter into a leasing arrangement where the aggregate purchase cost of items is less than $200,000.  This is referred to as the Minimum Leasing Limit.  Accordingly, items with a cost of less than $200,000 must be purchased outright in accordance with FMPM Policy 710 – Purchasing and FMPM Procedure 711 – Procurement Manual.

Items with an outright purchase cost of $200,000 or greater.
Where, after careful consideration of all other alternatives it is determined that the University is not able to fund an outright purchase then the option of leasing may be considered.

The Lease Custodian is responsible for:

• Obtaining quotes for outright purchase in accordance with FMPM Policy 710 – Purchasing and FMPM Procedure 711 – Procurement Manual;

• Submitting to the Chief Financial Officer an initial lease proposal demonstrating why leasing is the preferred method of acquisition (as opposed to outright purchase).

Financial and Business Services is responsible for:

• Obtaining quote(s) for leasing, including ensuring Queensland Treasury Corporation (QTC) has the opportunity to quote;

• Determining the most cost effective financing option.  The total cost of leasing must be compared (on a net present value basis) with other leases to ensure best value is identified.  Therefore, multiple quotes are required, one of which must be from the QTC.  The University is only obliged to accept a QTC quote where it represents best value;

• Reviewing a lease vs. buy analysis;

• Comparing the best value lease (on a net present value basis) with the cost of alternative acquisition methods, including borrowing, recoverable funding and/or outright purchase.  Where the best value lease is more costly than the cost of alternative acquisition methods then approval to enter into the lease must be sought from Queensland Treasury via the Queensland Office of Higher Education.  Best value can be determined by the cheapest interest rate, cost of delivery and disposal of equipment at end of useful life etc.;

• Determining whether the lease is a finance or operating lease in accordance with the guidance provided by Australian Accounting Standard Leases (AASB 117); and

• Ensuring the correct budget and accounting treatments are applied to the lease transactions.

Operating Lease

• If the lease is an operating lease and best value, the University can proceed without any further action.  If not best value, then approval must be sought from Queensland Treasury via the Queensland Office of Higher Education.  It is highly unlikely that this course of action will be pursued;

• Lease payments under an operating lease normally include a premium for the acceptance of the risk in the asset by the lessor. An operating lease will represent value for money if the cost premium is commensurate with the risk transfer. For public sector entities a premium of up to 5% of the capital cost of the equipment is generally considered an acceptable cost for the transfer of risk from the lessee to the lessor.

• The risk premium is calculated by dividing the difference between the net present value of the lease and purchase alternative by the capital cost of the equipment.

• If the risk premium is less than 5% the University can proceed without any further action.  In cases where an operating lease carries a premium over the purchase option of over 5%, there should be sound reasons for further consideration of the proposed transaction. Approval must be sought from Queensland Treasury via the Queensland Office of Higher Education.  It is highly unlikely that this course of action will be pursued;

• QTC has developed a lease vs buy analysis spreadsheet to assist in calculating the premium for an operating lease which should be utilised to form appropriate decisions.

• Where any operating lease has a total net present value of base lease rental payments in excess of $2 million then approval must be sought from the Queensland Treasurer under the State Borrowing Program;  and

• Where a "master" lease facility is in place, under which individual leases may be entered into by the University from time to time within a specified limit, and the limit exceeds $2 million then approval must be sought from the Queensland Treasurer under the State Borrowing Program.

Finance Lease

• A finance lease is considered to be a borrowing.  If the lease is a finance lease then approval to enter into the lease must be sought under the State Borrowing Program from Queensland Treasury via the Queensland Office of Higher Education.

Finance Committee Directive 430 -Borrowing also requires that approval must be sought from Finance Committee and Council prior to negotiating borrowing arrangements.

Finance leases are not a preferred option for acquisition by the University.

Related documents, legislation or JCU Statutes

Financial and Performance Management Standard 2009 (s25)

Statutory Bodies Financial Arrangements Act 1982 (s32, 33, 34 & 35)

Australian Accounting Standard (AASB) 117 Leases

Leasing in the Queensland Public Sector – Policy Guidelines (as revised December 2006

For enquiries in relation to this Finance Procedure please contact farp.finance@jcu.edu.au

Administration

Approval Details

Revision History