How GASB 87 Impacts Airports

GREG MILLER: Welcome to the Cherry Bekaert podcast on the impact of GASB 87 on airports. I'm Greg Miller, the leader of Cherry Bekaert’s government transportation team.

GREG MILLER: Joining me is Alex Wiley, an advisory senior manager in Cherry Bekaert’s Risk and Accounting Advisory Services.

ALEX WILEY: Thank you, Greg. I look forward to having this podcast with you.

ALEX WILEY: As Greg noted, my name is Alex Wiley, and I lead our GASB 87 implementation group within Cherry Bekaert.

GREG MILLER: Back in June of 2017, the GASB issued a new single lease reporting model for reporting lease arrangements. GASB 95 postponed the effects of GASB 87 implementation for 18 months.

GREG MILLER: We have finally arrived at that point of implementation. Today, we're going to discuss the impact of GASB 87 on airports.

GREG MILLER: Alex, as a quick refresher, what is a lease? How does GASB 87 require airports to report their lease arrangements as the lessee and the lessor?

ALEX WILEY: Greg, thanks for starting me off with a softball question. For the group, a lease is a contract that conveys control of the right to use another entity's non-financial asset as specified in the contract for a period of time in an exchange or exchange-like transaction.

ALEX WILEY: For airports as lessees, they must report a liability for the contract with a corresponding intangible right-of-use asset indicating their ability to use that leased item.

ALEX WILEY: Similarly, for an airport that is a lessor, they must report a receivable for their future lease revenue and a corresponding deferred inflow of resources.

GREG MILLER: Unlike most other governmental entities, which will primarily be impacted by lessee reporting requirements, airports will be much more significantly impacted by lessor reporting requirements. What are some of the nuances in this pronouncement that might impact our airports?

ALEX WILEY: That is a good point, Greg. Paragraphs 42 and 43 of GASB 87 will hopefully have a positive impact on our airport authorities.

ALEX WILEY: Those paragraphs discuss regulated leases, which are exempt from certain provisions of GASB 87. To be a regulated lease and be exempt, those leases must be subject to external laws, regulations, or legal rulings and meet certain criteria under paragraph 43.

ALEX WILEY: Those criteria are that rates cannot exceed a reasonable amount, and rates should be similar to lessees in a similarly situated lease. Lastly, a lessor cannot deny a potential lessee the right to enter into similar types of leases for similar facilities.

ALEX WILEY: The FAA has issued a policy statement on aeronautical uses of airports that meets all three of those requirements. In other words, if an airport has a lease associated with activity directly related to the operation of an aircraft, those leases would be considered exempt from reporting a lease receivable and a deferred inflow of resources within their financial statements.

ALEX WILEY: It is important to note that this does not mean the airport is exempt from implementing GASB 87. It means there are certain leases an airport is party to that could be exempt from specific provisions of GASB 87.

GREG MILLER: With the various AIP statutes, grant assurances, and rate and charges policies we use from the DOT and FAA, it makes sense that leases for services involving the operation of aircraft or flight support could be considered regulated leases.

GREG MILLER: Are there any exceptions to this exception? GASB always likes to throw in an exception to the exception.

GREG MILLER: I am thinking of examples where activities might be related to aircraft operations but do not necessarily fall under the definition of a regulated lease. These might include reservation centers or ticket counters.

ALEX WILEY: That is a very good question. You are right about GASB and the exceptions to the exception.

ALEX WILEY: Aeronautical leases are not limited to just the movement of passengers. They can also include the movement of baggage, mail, and cargo through an airport.

ALEX WILEY: A regulated lease could also include passenger airline leases, FBO leases, hangars, and cargo facilities. Within those leases, there can also be operations related to ticket counters, baggage facilities, and various cargo sorting and storage facilities.

ALEX WILEY: Examples of what would not be included are services that do not need to be physically located at an airport. These could be reservation centers, headquarter offices, or even flight kitchens.

ALEX WILEY: These are services that can be provided to an airport authority off-site from the airport property. Those leases would not conform to the provisions of GASB 87 since they would not meet the criteria to be considered regulated leases.

GREG MILLER: So, for activities directly related to the movement of passengers, baggage, mail, and cargo that need to be located on an airport, we will not have to recognize a lease receivable or that deferred inflow. Are there any specific disclosure requirements associated with these aeronautical leases?

ALEX WILEY: For any regulated leases, including aeronautical leases, the pronouncement does require certain disclosures. This list is not all-inclusive, but it gives a good overview.

ALEX WILEY: A general description of the agreement is a requirement. The extent to which capital assets are subject to preferential or exclusive use by a counterparty is also required to be disclosed.

ALEX WILEY: In addition, the total amount of inflows of resources, such as lease receivable and interest revenue, is required to be disclosed in the footnotes. The schedule of expected future minimum payments is always a requirement within the disclosures.

ALEX WILEY: The amount of inflows of resources recognized in the reporting period related to variable payments must be disclosed. Lastly, the existence, terms, and conditions of any options associated with the lease by the lessee must be included.

GREG MILLER: That covers our regulated leases. Even though we do not have to record them on the face of the financial statements, there are always disclosure requirements involved.

GREG MILLER: Outside of regulated leases, how should airports be reporting other leases such as terminal concessions, ground transportation, parking, or rental car operations?

ALEX WILEY: Although those leases are aviation-related uses, they are not directly related to the aircraft operation. As such, they are good examples of non-aeronautical leases that will be subject to the provisions of GASB 87.

ALEX WILEY: These require the recognition of a lease receivable and a corresponding deferred inflow of resources. Like any other leases within the provisions of GASB 87, the receivable will be reflected as the present value of lease payments to be received over the term of the lease.

ALEX WILEY: The deferred inflows will reflect the receivable plus any payments made before the commencement date. The airport will also continue to reflect the underlying asset of that associated lease on the statement of net position.

ALEX WILEY: On the statement of changes, an airport will recognize interest revenue, lease receivable revenue, and revenue from the deferred inflow. In the notes, there should be a description of the leasing arrangement as well as the total revenue recognized from those leases.

ALEX WILEY: Greg, you have asked me several questions. Let me ask you, with the changes in how an airport will present leases within the ACFR, both as the lessee and lessor, what are some of the potential impacts on reporting outside of the financial statements?

GREG MILLER: That is a great question. GASB always has an impact on the financial statements and external reporting.

GREG MILLER: In airport finance, there are two other realms that are affected by these GASB implementations: bond disclosures and rates and charges.

GREG MILLER: If history gives us any insight, we can look back at how GASB 68 and GASB 75, which dealt with pensions and OPEB liabilities, impacted these areas to anticipate the impact of GASB 87.

ALEX WILEY: What impact will the lessor reporting have on bond disclosures or rates and charges?

GREG MILLER: From the lessor perspective, the real impact is the geography of where historical rental revenues will be classified in the statement of changes. Historically, leases have been reported entirely as operating revenue.

GREG MILLER: Under GASB 87, a portion of that rental revenue will be attributed to interest income, which is a non-operating revenue. This suggests a decrease in pledged revenues for bond payments and raises the question of whether that interest income can be excluded from airline credits under the rates and charges perspective.

GREG MILLER: Bond documents will typically define what is included or excluded from revenue, and that will vary from deal to deal. However, most definitions are broad enough that all monies received and earned would be classified as pledged revenue.

GREG MILLER: Whether that technically sits in non-operating revenue or not, it could still be included in that calculation of pledged revenue. I recommend that you consult with your bond counsel to get the actual legal opinion on your specific bonds.

GREG MILLER: Including non-operating revenues typically increases the security to the bondholder, so it should generally be sufficient to include as part of pledged revenue.

GREG MILLER: For rates and charges, the impact depends on whether you use a residual or a compensatory methodology. For compensatory, concession revenues are typically included in that rate calculation, so there would be very limited impact.

GREG MILLER: On the residual side, it goes back to the bond documents. If the interest income is picked up as revenue, then we would most likely have a reduction in those airline requirements.

ALEX WILEY: That is perfect, Greg. How about on the lessee side?

GREG MILLER: That impact primarily stems from where the expenses are classified within the statement of changes, whether they are operating or non-operating expenses. Just like interest revenue on the lessor side, lessees will now have a portion of rent expense attributed to interest expense.

GREG MILLER: This is a non-operating expense. Although airlines tend to dislike imputed interest as much as they dislike depreciation, the definition of O&M typically includes all expenses incurred to operate and maintain the airport.

GREG MILLER: Sometimes that definition even cites GAAP as how an expense is determined. As such, there should not be any issues recovering these costs from an airline; they might just fall into a different bucket.

ALEX WILEY: That is good information. I am curious to see how GASB 87 impacts internal reporting as well as non-GAAP external reporting.

ALEX WILEY: Most of this information has always been included in the notes of the financial statements, so rating agencies should be aware of where this lease information is located.

ALEX WILEY: It sounds like most internal reports, industry reports, and feasibility studies might continue using the old capital and operating lease methodologies. From an FAA perspective, the new GASB 87 information will be reported within the ACFR, which may cause some consistency issues.

GREG MILLER: That is a great point, as those consistency issues might make it more difficult to compare internal KPIs and impact benchmarking against peers.

GREG MILLER: From your perspective, what tools or software have you seen airports use to track their leases and general lease reporting requirements? Is there a threshold for when an airport needs a software system versus an Excel file?

ALEX WILEY: A lot of my clients are asking that question every day. There are several leasing software providers to choose from that have GASB 87 functionality, from LeaseQuery to Visual Lease to LeaseCrunch.

ALEX WILEY: In practice, most airport authorities have been selecting DebtBook because they have a specialized focus on governmental accounting and can handle regulated leases.

ALEX WILEY: Leasing software has become very cost-effective for non-public governmental clients. For as few as five leases, you should start thinking about using software because it is efficient for you.

GREG MILLER: That makes a lot of sense, especially with pricing per lease. If you have five leases or more, you probably want to track it within a software system rather than an Excel file to avoid risks like file corruption or formula errors.

ALEX WILEY: That is exactly right.

GREG MILLER: Thanks, Alex. I appreciate you joining us today and sharing your insights on how GASB 87 will impact our airports.

GREG MILLER: The Cherry Bekaert government services website is a great resource for other thought leadership related to GASB 87 and future accounting pronouncements. It also provides a lease accounting implementation tool for reference.

GREG MILLER: As a quick disclaimer, Cherry Bekaert is not providing accounting, financial reporting, or tax advice on this podcast, so please consult with your accounting and tax advisors or Cherry Bekaert for more guidance.

GREG MILLER: If you want more information on GASB 87 or any other topic that might impact your airport, visit our website at cbh.com. Thanks for joining us.