Most Frequently Asked Questions (“FAQs”) about GASB 87 and What You Need to Know to Comply
Alex Wiley | Senior Manager, Risk & Accounting Advisory
Christian Fuellgraf | Principal, Government & Public Sector Leader
In June 2017, the Governmental Accounting Standards Board (“GASB”) released its much-anticipated lease standard, GASB Statement No. 87 (“GASB 87”). This lease standard may significantly impact your entity if you have contracts that are leases or contain leases that support your entity operations.
Historically, operating leases have been “off the balance sheet,” but the new GASB 87 standard requires all leases with lease terms exceeding one year to be recognized as both a “right-of-use” asset and a lease liability on the balance sheet, with certain exceptions.
With the new requirement, there are many considerations when evaluating your lease compliance, including writing new or updating policies and procedures, evaluating your current leases, updating financial statement disclosures, and establishing procedures to maintain the calculations going forward.
As we have helped our clients in the State and local government and the public sector, we have identified the most relevant Frequently Asked Questions (“FAQ”) below about GASB 87.
GASB 87 increases the usefulness of governmental financial statements by requiring recognition of certain lease assets and liabilities for all leases, including those that previously were classified as operating leases and recognized as income by lessors and expenditures by lessees. GASB 87 replaces the previous lease accounting methodology and establishes a single model for lease accounting based on the foundational principle that leases are a financing of the right to use an underlying asset.
GASB defines a “lease” as “…a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.”1
Examples of nonfinancial assets include buildings, land, vehicles, and equipment (including copiers, heavy equipment, hangars). Any definition meeting these examples should be considered when evaluating for GASB 87 compliance. Furthermore, certain non-financial asset-based lease agreements are out of scope, such as: Leases of intangible assets, leases of biological assets, inventory leases, supply contracts, service concession arrangements and other certain agreement types, such as assets financed with outstanding conduit debt.
Under GASB 87 there is not an established approach to determine materiality. It is a matter of judgement by management. However, when evaluating materiality, management should be thinking individually and, in the aggregate, if a lease or population of leases are material.
A short-term lease is defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract.
There are several key actions you want to consider before implementing the lease standard, including reviewing your inventory for all leases, re-examining all of your service contracts for embedded assets – replacement rights, etc., capturing as much data as you can around lease term and rents, renewal options, purchase options, service elements in leases, and contingent rent / percentage rent. Lastly, you may want to consider lease software to ensure full compliance, data integration and validation, calculation accuracy, and other advanced reporting options.
When evaluating the remaining lease terms of an applicable lease, management should consider if there are 12 months or more remaining of the lease term in the FY of reporting. In other words, if as of the beginning of the fiscal year to the reported on there are 12 months or month, then such lease is considered longer greater than 12 months. If less than 12 months at the beginning of the fiscal year, then it is considered short term.
Yes, when you have a contract for length of 12 months or more to lease an asset you control the right and use of it, it is considered an embedded lease.
With the implementation of GASB 87, there are three distinct categories represented as short-term leases, contracts that transfer ownership and other all other leases. Previously, there were only two categories classified as “operating” and “capital.”
GASB 87 uses terms specific to lease agreements and GASB 96 uses terms specific to subscription-based information technology arrangements (“SBITAs”).
GASB 87 is the new lease accounting standard for government organizations.
GASB 96 establishes accounting guidelines for subscription-based information technology arrangements, including defining what a SBITA is. The goal of this standard is to improve government financial reporting by providing uniform guidance for IT subscriptions which are a growing resource for many state and local government organizations.
We will continue to monitor all develops on GASB 87 and 96, and ASC 842 developments and share updates as additional guidance related to the Lease Accounting Standard becomes available. If you have questions or want to learn more about the GASB 87 compliance, consult your Cherry Bekaert advisor or contact our professionals in Cherry Bekaert’s Accounting Advisory practice.
Website: Lease Accounting Services (ASC 842 and GASB 87)
Podcast: GASB 87 Impacts on Airports
Webinar: Implementing ASC 842 and GASB 87 Lease Standards
Alert: GASB 87 Lease Accounting Implementation Tool for Governments