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201612363

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100

UWHC,UWMF,

Policies,Administrative,UW Health Administrative,Fiscal Affairs

Lease Policy (2.34)

Lease Policy (2.34) - Policies, Administrative, UW Health Administrative, Fiscal Affairs

2.34

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Administrative (Non-Clinical) Policy
This administrative policy applies to the operations and staff of the University of Wisconsin Hospitals and
Clinics Authority (UWHCA) as integrated effective July 1, 2015, including the legacy operations and
staff of University of Wisconsin Hospital and Clinics (UWHC) and University of Wisconsin Medical
Foundation (UWMF).
Policy Title: Lease Policy
Policy Number: 2.34
Effective Date: December 1, 2016
Chapter: Fiscal Affairs
Version: Original
I. PURPOSE
To establish guidelines and controls for departments who are exploring potential lease arrangements (as
lessee) for equipment or property.

II. DEFINITIONS

A. Capital lease (aka financing lease)
1. A capital lease is an arrangement in which the structure, economics or other terms of the
lease are such that the lessee is deemed to have essentially purchased the property or
equipment. This distinguishes it from the other type of lease, an “operating lease,” which
is defined later.
2. Capital leases are recorded as though the lessee is the owner and financed the leased asset
through long-term debt. As such, capital leases impact UW Health’s balance sheet for
purposes of measuring bond covenants and rating agency ratios.
3. To provide a relatively straightforward mechanism for differentiating between capital and
operating leases, the accounting community has developed a list of four criteria. Those
criteria are primarily intended to assess whether a lessee will either have paid so much in
rent that it effectively paid nearly the full value of the item, or that it has the right to use
the item for so much of its expected economic life that the lessee will effectively “use up”
the utility of the item.
4. A lease that meets any one of the following four criteria is deemed a capital lease:
a. Title is transferred at the end of the lease. If the lessee, by terms of the lease, will
own the asset at the end of the lease, that is an obvious indication of the ultimate
intent of the lessee to function as the owner, not just as a lessee.
b. The lease contains a bargain purchase option as defined in the accounting
literature. In essence, if a lessee can buy the leased item at a price materially
below its then present fair market value, it is deemed a bargain purchase. This
criterion is similar to the first criterion, meaning that if the lessee can purchase
the asset for a value that is materially below its fair market value at the end of the
lease, the accounting community views that as an indication that ownership is the
ultimate goal and likely outcome.
c. The lease is for a term greater than or equal to 75% of the economic useful life of
the leased item. For this purpose, the American Hospital Association useful life
guidelines must be used as the economic life. Any non-cancellable renewal

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periods are included in the numerator. The premise of this criterion is that leasing
an asset for 75% or more of its economic life is tantamount to using up the full
utility of the asset.
d. The net present value of the minimum lease payments is greater than 90% of the
fair market value of the equipment at the inception of the lease. This criterion is
based on the thought that paying rent over the lease term at a level nearly equal to
the value of the leased asset suggests that the lessee was merely financing the
asset similar to the way one might finance an asset through a bank loan.
B. Operating lease. A lease arrangement in which the structure, economics or other terms of the
lease are such that the lessee is deemed to have obtained rights to use the property or equipment
only for a limited time period without other typical rights of ownership. A lease does not meet the
criteria listed in A above for capital lease treatment is deemed to be an operating lease.
C. Return on investment. Also referred to as “ROI,” this relates to the financial analysis used to
determine whether a financial transaction of any type provides sufficient and timely savings or
income to the party entering the transaction to support the commitment of dollars to the proposed
transaction. It is typically measured by an average annual percentage return on the funds
committed to the transaction, or in terms of a “payback period,” the period of time (generally
expressed in months or years) in which the incremental savings or income from the transaction
equal or exceed the dollars committed to the transaction.
D. Bargain purchase option. The right given to a lessee in certain lease transactions to purchase the
leased property or equipment at or prior to the end of the lease term for a price materially below
the fair market value at the time.
E. Economic life of an asset. Also referred to as “useful life,” it is the period of years that a building
or piece of equipment is expected to be usable. In the health care industry, the useful life of an
asset for determining proper accounting treatment (operating or capital) is the life reflected in the
American Hospital Association publication Estimated Lives of Depreciable Hospital Assets. The
Accounting Department retains a copy of that publication.
F. Use/Lease. This is an arrangement in which a vendor allows a customer to use a piece of
equipment, either for free or at a discounted price, as a component of a broader transaction for
purchase of supplies. While such transactions are often intended to be structured as operating
leases (or not leases at all), in fact they often pass one or more of the four capital lease criteria.
There kinds of arrangements are also sometimes referred to as “royalty free” or “cost per
reportable.”

There are other arrangements that are subject to the lease accounting rules, including “loaners”, “loan to
lease”, “kits” or others. Loans of trial clinical equipment are specifically governed by UW Health
Administrative Policy 11.35-Evaluation of Capital Clinical Equipment. Refer to that policy when
applicable. Departments exploring other transactions that have leasing characteristics and are not
specifically discussed in this policy should consult with the Accounting Department to determine the
proper accounting and reporting procedure.

III. POLICY ELEMENTS

A. Every significant capital item should be incorporated into a department’s ongoing multi-year
capital planning and those that are deemed highest priority should be submitted in connection
with the annual capital budgeting process. That planning and budgeting involves prioritizing the
most essential items and deferring to later years those that do not rise to the priority level. Once a
decision is made to move forward with a capital item, a joint decision should be made between
the operating department and Finance as to whether to purchase or lease the item. That decision
has a direct bearing on the financial statements and financial performance of UW Health.
B. Leasing shall not be viewed as a mechanism to bypass the capital planning and budgeting process

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or to obtain items that were not otherwise funded in the capital budget.
C. Any capital lease involving a net present value greater than $5,000 must either be included in the
approved capital budget or approved for use of capital contingency funds.
D. This policy applies to all proposed arrangements in which UW Health would be the lessee, either
in fact or in substance. Those include:
1. Leases for land (should only originate in the Planning, Design & Construction Dept.).
2. Leases for all or a portion of a building (should only originate in the Planning, Design &
Construction Dept.).
3. Leases for equipment, including software.
4. Arrangements under which we purchase supplies and vendors supply equipment at zero
or negligible cost (use/lease arrangements).
5. Upgrades to equipment that are embedded in maintenance agreements.
E. Leases/Space use Agreements of space in University Hospital and AFCH between UW Health
and the UW School of Medicine and Public Health are specifically exempted from this policy and
are covered under Wisconsin Statutes Chapter 233.04(7).

IV. PROCEDURE

Departments contemplating leasing arrangements where the present value of the lease payments over the
life of the lease will exceed $5,000 are expected to follow these steps:
Steps Who? Required Document
1 ξ Buy or lease analysis on all equipment
requested leases

ξ ROI on any new non-replacement not
equipment over $1M not routed to
tech assessment

Buy or lease NPV analysis on all
Building Requested leases
Requesting department


EA-PPA


EA-
PPA/Finance/Facilities
Simple Buy vs Lease


ROI analysis document


Buy or lease NPV
analysis
2 Is there a facility renovation cost to ready the
space for use of equipment?

If yes, route to facilities for cost and approved
budget if greater than $5K
Facilities and
Engineering
Construction quote
3 If decision is to buy, use normal capital
process (identify capital project ID funding
source, including facility renovations)
Department and VP Annual capital budget or
contingency/substitution
request
4 Evaluate whether lease is capital or operating,
including evaluation of use/lease
arrangements
If decision is to lease, VP must approve Lease
Justification.
Accounting


Department and VP
Draft lease with
evaluation of 4 capital
lease criteria

Lease Justification

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A. There will inevitably be circumstances that do not fit neatly into the processes defined above.
B. Department managers are encouraged to consult with the Accounting Manager in those cases.
C. Among the kinds of transactions that will necessitate consultation include:
1. Whether to buy out a lease at end of term
a. UW Health may be presented with the option to buy out a lease at the end of its
term. The cost/benefit of that alternative should be vetted with input from either
the Accounting team or EA-PPA. Start considering any lease buyouts during the
budget process for the year in which the lease will end (example, if the lease
expires 6/30/2016, you’ll want to determine whether you’re buying out the
equipment in the budget process starting in the fall of 2014 for FY16 budget). If
you’re buying out the equipment you’ll likely need to request minor equipment
budget and if you’re replacing the equipment, you’ll likely need to request capital
budget.
V. FORMS

Simple Buy vs. Lease
Lease Justification

VI. COORDINATION

Sr. Management Sponsor: SVP, Chief Financial Officer
Author(s): General Accounting Manager; Manager Financial Accounting

Approval Committee: UW Health Administrative Policy and Procedure Committee

SIGNED BY

Elizabeth Bolt
UW Health Chief Administrative Officer


Revision Detail

Previous revision:
Next revision: 122019
5 ξ If lease is a capital lease, identify
capital project ID funding source,
including facility renovations
Department and VP Annual capital budget or
contingency request
Steps Who? Required Document
6 ξ If lease is a capital lease, VP
Finance/CFO must approve
additional debt
VP Finance/CFO
7 If transaction is approved, complete purchase
order
Department PO
8 Approval of lease document or other legal
document
Legal Draft legal documents

9 Signature Per signature authority Executable lease