Insights: Article

GASB 87, Leases: Is Three Years Enough to Implement?

By Lealan Miller

April 20, 2018

The Government Accounting Standards Board (GASB) issued GASB Statement No. 87, Leases (GASB-87) in June 2017. The GASB deemed it was necessary to update the lease guidance to provide better information to financial statement users.

GASB-87 requires all leases to be reported as capital leases and eliminates the classification of an operating lease unless the lease is a short-term, defined as 12 months or less. Under the single approach to accounting for and reporting leases, a lessee will recognize a lease liability and a corresponding intangible asset representing the lessee’s controlling “right to use” the asset. 

In conjunction with reporting the asset and liability, the lessee will also report amortization expense of the intangible asset over the shorter of the life of the asset or the lease, and will report interest expense on the lease liability and provide footnote disclosures about the lease. The standard does not apply to:

  • intangible assets including mineral rights, patents, software, etc.
  • biological assets
  • inventory
  • service concession arrangements as addressed in GASB Statement 60
  • assets financed with conduit debt
  • supply contracts such as power purchase agreements
  • transfer of an asset to the lessee at the end of the agreement. This is considered a finance purchase and is reported as a long term liability.

GASB-87 discusses how setting a high capitalization threshold policy for leases should not result in a lack of reporting assets and liabilities that are material collectively of all lease contracts. It also discusses the fiscal funding/cancellation clauses that should not be taken into consideration unless the clause is reasonably certain of being exercised. Gone are the days of circumventing the reporting of capital leases by including the funding/cancellation clause.

The standard is not applicable until periods beginning after December 15, 2019 (December 31, 2020, for December year-ends and June 30, 2021, for June year-ends). There are several implementation issues facing governments regarding GASB-87, and the current implementation date provides a window of opportunity for governments to start the process early.

In order for governments to prepare for the standard, the following steps should be taken soon. Some of the steps include:

  • Determine if bond covenants or debt limit provisions need to be modified as a result creating additional capital leases liabilities.
  • Establish policies that can be applied to current leases being created and will be in effect when GASB-87 is implemented. These policies can include:
    • Identify capitalization thresholds for reporting leases.
    • Provide a framework that addresses “reasonably certain.” The reasonably certain phrase was included in the standard to help governments determine the length of the contract including extensions and termination clauses. 
    • Develop a framework that addresses the allocation process and procedures dealing with non-lease components of the lease agreement. These non-lease items can include maintenance, utilities, repairs, etc. We will address the allocation process in a later article.
    • Develop a system to capture the data related to lease terms, estimated lease payments and other components necessary to calculate the lease liability and intangible asset.
    • Watch for GASB’s implementation guide to help applying the new standard.

While it seems three years is a ways down the road, governments should start determining the effect of the new standard and institute processes and procedures for identifying potential leases in order to effectively determine the magnitude and effect of implement GASB-87.

If you have additional implementation question, please reach out to an Eide Bailly professional.

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