Effective for fiscal periods ending June 30, 2022, and thereafter, the Governmental Accounting Standard Board’s (GASB) Statement 87 was issued to improve lease accounting and financial reporting by government entities. At a recent webinar, we covered the details of GASB-87 and how newly implemented changes align with GASB’s conceptual framework to result in more useful information and consistency in financial reporting, simplifying the tedious process for government organizations.
Below, we summarize these changes to help you understand the technicalities behind GASB-87 and how they may affect you.
It’s important to note that the lease standards apply to any contract that meets the definition of a lease – defined by the standard as “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction.”
GASB-87's Unified Reporting Model for Leases
Under GASB-87, there are certain reporting guidelines to be aware of. There is, for instance, no longer a classification of leases as operating or capital, and there is an underlying assumption that all leases are financing. Furthermore, there are exceptions for lessors and lessees, including short-term leases, and leases that transfer ownership and do not contain termination options. Exceptions for lessors only include leases of assets that are investments and certain regulated leases.
For financial reporting purposes, one of the most important considerations is to determine the correct lease term. This includes the lease’s noncancelable period, plus any periods covered by options to extend (if reasonably certain of being exercised).
GASB-87’s guidelines also state that: within a lease term, fiscal funding and cancellation clauses are ignored unless they are reasonably certain of being exercised.
When reporting on short-term leases (a lease with a maximum contracted length of 12 months or less), there are additional guidelines to follow.
Under short-term leases, lessee accounting recognizes expenses and expenditures based on the terms of the contract but doesn’t recognize assets or liabilities associated with the right to use the underlying asset. Lessor accounting, on the other hand, recognizes lease payments as revenue based on the payment provisions of the contract and doesn’t recognize receivables or deferred inflows.
GASB-87 General Lessee and Lessor Disclosures
When reporting, lessees and lessors must make several disclosures, including a general description of leasing arrangements, such as:
- The total amount of lease assets and the related accumulated amortization
- The amount of outflows of resources recognized for the period for variable payments and other payments not previously included in the measurement of the lease liability
- The principal and interest requirements to maturity for each of the next five fiscal years and in 5-year increments thereafter
- Commitments under leases that haven’t yet begun (excluding short-term leases)
- The components of any net impairment loss recognized on the lease asset during the period
- The total amount of inflows of resources, such as lease revenue and interest revenue, if not otherwise displayed
- The amount of inflows of resources recognized for the period for variable payments and other payments not previously included in the measurement of the lease receivable
- The existence, terms and conditions of options by the lessee to terminate the lease or abate payments if the lessor government has issued debt for which the principal and interest payments are secured by the lease payments
Implementing the Standards
To ensure a smooth implementation of GASB-87, it is imperative to develop a system to centralize and document lease information. At a minimum, documentation should include: (1) the details of the lease agreements (lessor, lessee, underlying asset) and (2) the lease terms contained within the agreement, including the initial term, extension options and maximum lease term.
Getting used to the new standards will take time. Start by identifying and evaluating potential leases. To capture all potential leases, you’ll want to review your general ledger activity, including accounts with rental revenue or expenses, examine your archives for key agreements, financial audit documentation and historical board reporting. Lastly, don’t forget to reach out to representatives from other departments to gather all applicable information, especially if you operate in a decentralized environment.
The time for implementing GASB-87 is here, but ongoing compliance with the lease standards for government entities doesn’t have to be a challenge. Sikich offers a simplified Lessee Ledger tool for organizations to streamline implementation. If you’re interested in learning more or to speak to our experts, please contact us below.