Is Your Government Ready to Implement GASB-87, Leases?

June 1, 2021 | Article

By Chad Hess, CPA

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.

What GASB-87 Entails

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 fewer. 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. They will also 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.

GASB has issued numerous delays on a number of statements in the wake of COVID-19.

Upon issuance of GASB Statement No. 95, Postponement of the Effective Dates of certain Authoritative Guidance, the lease standard is not applicable until periods beginning after June 15, 2021 (June 30, 2022, for June year-end and December 21, 2022, for December year-ends). There are several implementation issues governments are facing regarding GASB-87, and the current GASB-87 effective 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:

  • Determine if bond covenants or debt limit provisions need to be modified as a result of creating additional GASB 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: 
    • Identifying capitalization thresholds for reporting leases.
    • Providing 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.
    • Developing 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 future article.
    • Developing 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.
    • Watching for GASB’s implementation guide to help apply the new standard.

Governments should start determining the impact of the new standard and institute processes and procedures for identifying potential leases in order to effectively determine the magnitude and effect of implementing GASB-87.

Understanding and implementing GASB-87 can be challenging. Learn how you can better avoid pain points.

Decisions for Governments to Consider When Implementing GASB-87

As the implementation date for GASB-87, Leases, is now here, your government has many decisions that need to be understood and documented in order to successfully implement the new GASB lease accounting standard. Furthermore, two other GASB standards that will be implemented next year utilize the same framework:

  • GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
  • GASB Statement No. 96, Subscription-Based Information Technology Arrangements

Here are a few of the decisions that governments need to consider when implementing the governmental lease accounting standard. This process of collecting, documenting and calculating the required elements can be very tedious depending on how many leases your government has.

GASB-87 Decisions:

 

Decision Point Questions to Ask Why
Authorized Signatories Who in your government will be authorized and responsible to commit the government to a new lease? This individual should be well versed in the nuances of the new lease accounting standard to ensure key requirements are documented in the lease agreement. These individuals will play a key role in helping the finance department assemble a complete list of current and future lease agreements the government is a party to. The more individuals authorized to sign leasing agreements, the stronger the internal controls must be to ensure a complete population of lease agreements. Communication between operations and accounting will be vital.
Discount Rates As a lessee, do your lease agreements state the interest rate charged by the lessor? If not, are you able to determine the implicit interest rate of the contract using known facts about the leased asset? As a last resort, the government’s incremental borrowing rate may be used as an acceptable discount rate for the lease calculation, specific to the lease term. If your government does not have borrowing specific to the lease term, a municipal index such as the one published in The Bond Buyer as of the date of commencement of the lease adjusted for the term may suffice, as long as it is consistently followed and documented.
Lease Components Does the government’s lease include non-lease components in addition to the leased asset? Some common examples are maintenance and common area charges on leased buildings or supplies and maintenance for the leased copy machine. Special care should be taken when valuing leases with multiple components, as non-lease components should be excluded from the lease calculation and treated as separate contracts. When considering new leases, it’s important to keep this in mind to make the valuation of future leases much easier.
Renewals and Extensions Does the lease contract contain an option for the lessee or lessor to extend the length of the lease? Have you considered the probability of exercising the option to extend? Under the new lease standard, this needs to be considered at the onset while valuing the lease. If it is reasonably certain the option will be exercised, the initial lease term should include this period in the calculation.
Variable Payments Are the payments under the lease fixed for the duration of the lease or variable based on an index such as the consumer price index? It is important to understand the future stream of payments upfront when preforming the lease calculation.

Here are some suggested steps to phase your GASB-87 implementation.

These are just some of the many decisions that need to be considered when implementing the upcoming governmental lease accounting standard. Depending on the number of leases your government has, it can be a very tedious process to collect, document and calculate the required elements for implementation.


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Our team of experienced advisors are knowledgeable about GASB-87 implementation, compliance, and news. Our software tools utilize machine learning, robotic process automation and other cloud-based software to help your government plan to implement the new standard. Contact us to learn more about our local resources and support services. Let us help your organization implement GASB standards and avoid unnecessary pain points.

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