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Financial considerations for lead agencies

Lead agencies need to decide whether the funding and cost models adopted constitute a finance lease or an operating lease.

Finance leases vs operating leases

There are two types of leases:

  • A finance lease is a lease that transfers all the risks and rewards incidental to ownership of an asset. The title may or may not eventually be transferred.
  • An operating lease is a lease where the risks and rewards incidental to ownership are not transferred.

Factors to consider

Take into account:

  • the lead agency will be the head lessee with 100% ownership of the fit-out
  • the Memorandum of Understanding (MoU) and co-location agreement (which is not deemed to be a legal contract when it’s between crown parties) will act as the leasing arrangement mechanism between the lead agency and participating agencies
  • there should be a return of capital at the end of the lease.

Lead agencies should consult the accounting standard ‘PBE IPSAS 13 – Leases’ and test with their auditors whether a finance lease arrangement applies. Departments that enter a finance lease arrangement need Minister of Finance approval.

Standard PBE IPSAS 13 - Leases – External Reporting Board

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