Many state and local governments are focusing on implementing Governmental Accounting Standards Board (GASB) Statement No. 87, Leases. Governments are quickly discovering that GASB-87 is not a standard to wait until the auditors schedule an entrance conference to get going to implement. The time to get started is NOW.
Here are a few frequently asked questions when it comes to the implementation of GASB-87.
1. Will the GASB repeal or extend implementation of GASB-87? No! They already extended once last year.
2. Is this particular contract that we are looking at a lease? GASB-87 defines a lease as a contract that conveys control of the right to use another entity’s nonfinancial asset (also known as the underlying asset), for a period as specified in the contract, in an exchange or exchange-like transaction. Exchange transactions are equal value for value and exchange-like transactions are almost equal value for value. Many contracts that do not have the word ‘lease’ or ‘rent’ in them may indeed fit this definition, so be careful!
3. What are these things called embedded leases? These contracts could be leases. Typical contracts that may have leasing components include:
It is especially important to query journals and ledgers for recurring payments and receipts from the same counterparty at the same frequency for similar amounts to perform due diligence on whether such contracts exist.
4. Is this contract in-scope or out-of-scope for GASB-87? GASB-87 lists seven major categories of contract that could be out-of-scope for GASB-87, the most common potentially being a contract that transfers ownership to the lessee without a termination option. In other words, commonly a tax-exempt lease-purchase. Special provisions are in place for lessors, including where the underlying asset meets the definition of an investments and contracts subject to regulation.
Here’s some suggested steps to phase your GASB-87 implementation.
5. How do we determine the lease term? The first step is to set aside contracts that have a maximum term without any option to extend of twelve months or less as determined at the start of the lease. Those will be short-term leases. The calculation of the remaining contract terms is similar for lessees and lessors. The noncancelable period in the contract is where to begin. Contract options may extend the period, depending on which party has the option, lessor, or lessee.
6. How do we determine the lease liability (or lease asset if we are leasing the property)? The lease liability (or asset) calculation is also similar for lessees and lessors. Contract contingencies are not included. Lessors exclude residual value guarantees, purchase options, termination penalties and certain other payments. A discounted present value calculation is then made.
7. How do we determine the discount rate to be used? Most contracts do not show the interest rate used. If your government has outstanding debt of varying maturities, your government’s incremental borrowing rate can be used, if the rate chosen aligns to the contract term. Every government will differ, so do not copy a peer government. Whatever policy is chosen, the policy will need to be effective, so consider carefully and involve your government’s financial team.
8. How do we determine components? Components are added payments (or receipts) in the contract beyond the contract payment. They may include common area maintenance, security, utilities, consumables and in some cases certain taxation. Once identified, to value the components, use similar contracts. If no similar contracts are available, use judgment to determine the component’s value.
9. When do we remeasure a lease? Remeasurement is needed often for lessees. The most common trigger of remeasurement is if there is a change in the lease term. Lessors do not have to remeasure in certain circumstances.
10. If we have comparative financial statements, when do we implement? Comparative financial statements have more than one year presented with a full set of notes for all periods presented and required supplementary information. The management’s discussion and analysis presents three years of comparisons if two comparative years are in the financial statements. If comparative financial statements are presented, then implementation is retroactive to the beginning of the earliest year presented. For June 30th governments, that is all the way back to July 1, 2020. It is difficult to say that it is not practicable to present that far back as the information needed is from written contracts.
11. Should we look at our policies and procedures? This is vital. Do not automatically jump to setting a materiality policy. Do you have a materiality threshold for other payables or receivables? Unlikely. Key policies may be needed for recordkeeping, lease authorization, discount rates and other elements.
12. Do we need software? Unless there are few contracts in your government of any sort, the answer is usually yes. Many contracts may last for decades, so a key question will be: how will those records be kept? The return on investment on lease software can be high. However, care must be taken to make sure that the software fits your operations, has workflow capabilities, and has capabilities that can be expanded.
How Can Eide Bailly Help?
We have an experienced team who knows about GASB-87 implementation. We have software tools that utilize machine learning, robotic process automation and other cloud-based software to help your government implement the new standard.
See what more we can bring to organizations just like yours.Government