With the postponements of effective dates of certain authoritative guidance by Governmental Accounting Standards Board (GASB) Statement No. 95, the effective dates of GASB Statement No. 87, Leases, and the related Implementation Guide No. 2019-3, Leases was postponed 18 months. The revised effective date of GASB Statement No. 87, Leases, is now scheduled for reporting periods beginning after June 15, 2021.
The implementation of this standard will cause the accounting by local governmental organizations for leases to change dramatically. Governments will also need to prepare for the implementation of this standard well in advance of the fiscal year-end reporting date. Understanding the definitions of a lease and the nature of your lease contracts and how they meet that definition will also become very important.
The Standard
GASB Statement No. 87, Leases, 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." Assets that could fit in this definition include land, equipment, buildings, and vehicles.
All contracts that fall under the definition of a lease will fall into three categories, short-term leases, contracts that transfer ownership, and lessee/lessor arrangements.
Short-term leases have a term of 12 months or less, including any options to extend. Leases that are month-to-month are considered short-term. Short-term leases will be accounted for similarly to operating leases, with lease payments being recorded as expense or revenue to the lessee or lessor.
Contracts that transfer ownership of the underlying asset transfers ownership to the lessee by the end of the contract. The transaction should be reported as a financed purchase of the underlying asset by the lessee, or sale of the asset by the lessor.
For contracts the government enters as the lessee, the government will, at the commencement of the lease term, recognize a lease liability as an intangible right-to-use leased asset. The lease liability will be measured at the present value of payments expected to be made during the lease term. Lease payments will result in a reduction of the lease liability and recognition of interest expense, as all leases under the standard will be considered financing arrangements. The leased asset will be reported at the sum of the initial measurement of the lease liability, initial direct costs, and lease payments made prior to commencement, less any lease incentives. The leased asset will be amortized over the shorter of the lease term or the useful life of the underlying asset.
For contracts governments entered as the lessor, the government will, at the commencement of the lease term, recognize a lease receivable and a deferred inflow of resources. The lease receivable should initially be measured at the present value of lease payments expected to be received during the lease term. Lease receipts will be recorded as a reduction of the lease receivable and recognition of inflows and revenues. The deferred inflow of resources will be reported at the sum of the initial measurement of the lease liability and lease payments received prior to commencement of the lease less any lease incentives. The lessor should not derecognize the asset underlying the lease and continue to record depreciation, as applicable.
Implementation Guidance
When implementing this standard, governments should use lease facts and circumstances that existed at the beginning of the fiscal year of the implementation period. The calculation of the term of the lease includes periods covered by options. Governments will start with the lease term of the noncancellable period. They will then extend the lease period if it is reasonably certain the period covered by the option will be exercised.
During the implementation of this standard, governments will also need to identify the interest rate used in the development of these lease contracts. During the recording of the lease transactions, governments will use either the stated interest rate, the prevailing interest rate of similar contracts, or the lessor’s own incremental borrowing rate.
Closing
Our staff is working diligently to fully understand the provisions of this standard, and how it is impacting our local government clients. If you have any questions on this standard or need help with an implementation question, please contact us and we will connect you with one of our highly-trained professionals in this area.
