The Governmental Accounting
Standards Board (GASB) has issued
Statement No. 87 “Leases,” with the objective
of improving consistency in the application of accounting and financial
reporting for leases by governments. GASB
87 requires the recognition of certain lease assets and liabilities for leases
that were previously classified as operating leases and recognized as inflows
or outflows of resources based on the payment provisions of the contract. It also establishes a single model for lease
accounting based on the foundational principle that leases are financings of
the right to use an underlying asset.
When Is GASB 87 Effective?
The requirements of this
Statement are effective for reporting periods beginning after December 15,
2019, and earlier application is encouraged.
Leases should be recognized and measured using the facts and
circumstances that exist at the beginning of the earliest period of implementation. However, lessors should not restate the
assets underlying existing sales-type or direct financing leases. Any residual assets for those leases become
the carrying values of the underlying assets.
GASB 87 Definitions
The Statement defines a lease as
a contract that conveys control of the right to use another entity’s
nonfinancial asset (i.e. a building, land, or vehicles and is referred to as
the underlying asset of the lease) as specified in the contract for a period of
time in an exchange or exchange-like transaction. Any contract meeting this definition should
be accounted for under the guidance contained in the Statement.
The lease term is the period
during which a lessee has a non-cancelable right to use an underlying asset,
plus any additional periods defined in GASB 87.
Short-term leases are defined as
leases, which at the execution of the lease term, have a maximum possible term
under the lease contract (including options to extend regardless of their probability
to be exercised) of 12 months (or less).
Lessees and lessors should recognize short-term lease payments as
outflows or inflows of resources, respectively, based on the payment provisions
of the lease contract.
How Does GASB 87 Define How Leases
Should Be Reported?
Lessee’s should recognize a lease
liability and a lease asset at the commencement of the lease term, unless the
lease is a short-term lease or it transfers ownership of the underlying
asset. The lease liability should be
measured at the present value of payments expected to be made during the lease
term (less any lease incentives received).
The liability should be reduced as payments are made and recognize an
outflow of resources for interest on the liability. The lease asset should be measured at the
amount of the initial lease liability plus any payments made to the lessor at
or before the commencement of the lease term and certain direct costs. The asset should be amortized in a systematic
and rational manner over the shorter of the lease term or the useful life of
the underlying asset.
Lessor’s should recognize a lease
receivable and a deferred inflow of resources at the commencement of the lease
term. Certain exceptions exist for
leases of assets held as investments, certain regulated leases, short-term
leases, and leases that transfer ownership of the underlying lease. The asset underlying the lease should not be
de-recognized The lease receivable
should be measured at the present value of lease payments expected to be
received during the lease term and the lessor should recognize interest revenue
as payments are received. The deferred
inflow of resources should be measured at the value of the lease receivable
plus any payments received from the lessee at or before the commencement of the
lease term. Revenue should be recognized
and the deferred inflow of resources reduced in a systematic and rational
manner over the term of the lease.
Lessees should disclose a
description of the leasing arrangements, the amount of lease assets recognized,
and a schedule of future lease payments to be made. Lessors should disclose a description of
leasing arrangements and the total amount of inflows of resources recognized
from leases for the period.
Contracts with Multiple Components and Contract Combinations
Governments should account for
lease and non-lease components of a lease as separate contracts. If a lease involves multiple underlying
assets, each underlying asset should be accounted for as a separate lease
contract. Lessees and lessors should use
contract prices for individual components as long as they do not appear to be
unreasonable or utilizing a best estimate approach if stated prices are not
available. Contracts entered into at or
near the same time with the same counter-party should be considered part of the
same lease contract and evaluated in accordance with the guidance for contracts
with multiple components.
Lease Modifications and Terminations
An amendment to a lease contract
should be considered a lease modification unless the lessee’s right to use the
underlying asset is reduced, which constitutes a partial or full termination of
the lease. A lease termination should be
accounted for by reducing the carrying values of the lease liability or lease
asset by a lessee, or the lease receivable and deferred inflows of resources by
the lessor. The difference in carrying
amounts is recognized as a gain or loss.
Lease modifications should be accounted for by remeasuring the lease
liability and adjusting the related lease asset by a lessee and remeasuring the
lease receivable and adjusting the related deferred inflows of resources by a
Subleases and Leaseback
Subleases should be accounted for as a separate transaction with the lessee becoming the lessor and following the lessor accounting noted above.
Sale-leaseback transactions only qualify if they include a sale; otherwise, they are borrowing transactions. The sale and lease portions of the transaction should be accounted for as separate sale and lease transactions. Any difference between the carrying value of the capital asset that was sold and the net proceeds from the sale should be reported as deferred inflow or outflow of resources and recognized over the term of the lease.
A lease-leaseback transaction should be accounted for as a net transaction and gross amounts of each portion of the transaction disclosed.
How Will GASB 87 Impact Your Financial Statements?
Most leases which extend beyond
twelve months and include the right to use an underlying non-financial asset
will now be required to be accounted for in the government’s financial
statements. This includes operating
leases, which are currently not reported on the balance sheet, and subject only
to footnote disclosure. No distinction between operating or capital leases will
remain upon implementation of the Statement.
This will, in large part, affect the government-wide financial
statements, although some changes to the fund financial statements will also occur
to recognize activity in accordance with fund reporting and consistent with how
capital leases are currently recognized.
Please note this summary of GASB 87 is not meant to substitute for reading it in its entirety.