SUNY RF; NFX; FRMC; operating versus capital lease

Condition and Cause Unrelated to the administration of sponsored programs, including federal grants and contracts, The Research Foundation for The State University of New York (the RF) is party to a lease for space in the NanoFabXtension (NFX) facility from Fuller Road Management Corporation (FRMC), a related party. Noting they relied on source documentation and representations of the lessor at the time the lease was executed, management originally determined that the lease, as amended in 2012 and which is effective from January 1, 2013 through December 31, 2028, was an operating lease. In 2016, management determined, after considering the required accounting treatment of the lease under Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 840, Leases, and the terms in the written lease agreement, that the lease is a capital lease. As a result, in preparation of its financial statements as of and for the year ended June 30, 2016, the RF has restated its 2015 financial statements to properly account for and present the NFX facility lease as a capital lease. The restatement of the 2015 financial statements indicates the RF has a material weakness in its internal control over financial reporting. Here, the RF did not maintain an effective control over the review of contracts between the RF and FRMC, resulting in the execution of an agreement that did not contain all negotiated terms and conditions. The execution of the agreement without the appropriate vetting and authorization led to the RF not appropriately considering the written contractual terms of the NFX facility lease arrangement and, instead, relying upon representations of the lessor and other available information that supported what management believed were the intentions of the parties. This overreliance on information outside of the written contract prevented the correct assessment under GAAP, which would have been the contract’s classification as a capital lease, and instead resulted in operating lease accounting at that time and caused the improper deferral of certain non-federal revenues tied to lease expenses recognized.


Ref: https://www.rfsuny.org/media/RFSUNY/Documents/Internal-Audit/single-audit-report-fy2015-16.pdf    pages 140-141