The Government Accounting Standards Board (GASB) issued GASB Statement No. 87, Leases (GASB-87) in June 2017. It’s been almost five years since GASB deemed it necessary to update lease guidance. Now is the time to implement it, without further delay.
Quick Review of GASB-87
GASB-87 requires all contracts fitting the lease framework to be reported like the old capital leases. There are no more operating leases unless the lease is a short-term contract, defined as 12 months or fewer without a possibility to renew. 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 an expense (interest) on the lease liability and supply footnote disclosures about the lease. The standard does not apply to:
- Financial assets
- Intangible assets, including mineral rights, patents, software, etc.
- Biological assets
- Service concession arrangements as addressed in GASB Statement 60
- Assets financed with conduit debt
- Computer software
- Regulated leases
- 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)
2022 is the year of implementation of the standard for all governments. For June 30 governments, the date of implementation began on July 1, 2021, unless fully comparative financial statements are issued. In that case, the date would have been July 1, 2020.
To prepare for the standard, the following steps should be taken soon:
- Gather all contracts that may even remotely be in scope for the lease framework. Analyze each contract for alignment with the framework within GASB-87.
- Search for contracts that may fit the framework but are not identified with the words ‘rent’ or ‘lease’ anywhere in the document. This may find unrecorded leases (or so – called embedded leases). Data analytics may be used to search your ledgers and journals for recurring payments (or receipts) from:
- The same counterparty, at
- Similar frequencies (monthly, quarterly, annually), for
- Similar amounts (within some variability aligning to inflation).
- Create an inventory of contracts with decisions made on each contract on whether the contract is in scope or out of scope and why. The inventory should be as of the implementation date and updated to the present.
- 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:
- 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.
- 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.
- Developing a system that identifies lease modifications and terminations.
- Addressing if bond covenants or debt limit provisions need to be modified because of creating additional lease liabilities.
- Identifying budgetary or statutory differences with Generally Accepted Accounting Principles (GAAP). GASB-87 removes a fiscal funding clause from consideration unless it is more than probable (reasonably certain) that the clause would be exercised, vacating the lease.
Additional GASB Updates
Two other GASB standards that will be implemented later in 2022 utilize the same framework:
- GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements and
- GASB Statement No. 96, Subscription-Based Information Technology Arrangements.
Further, the GASB is about to approve GASB Statement No. 99, Omnibus 2022 clarifying provisions within GASB-87, 94 and 96 for periods beginning after June 15, 2022. Those provisions include:
- Determination of the lease, public-private and public-public partnership (PPP) or subscription-based information technology arrangement (SBITA) term,
- Classification of a contract as a short-term lease or SBITA,
- Recognition and measurement of lease or SBITA liabilities and assets, and identification of incentives, and
- Recognition and measurement of installment payments and the transfer of the underlying PPP asset.
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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