A GASB Refresher
As a reminder, the following are pending Governmental Accounting Standards Board (GASB) pronouncements for the December 31, 2022 reporting periods:
- GASB 87, Leases
- GASB 91, Conduit Debt Obligations
- GASB 92, Omnibus 2020
- GASB 97, Certain Component Unit Criteria
The purpose of GASB 87 is to address accounting and financial reporting for leases.
What is a lease?
A lease is 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.
Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the lease’s guidance, unless specifically excluded in GASB 87. Short-term leases, where the maximum possible term under the lease contract is 12 months or less (including options to extend), are also excluded from the GASB 87.
Under GASB 87, there is no longer a classification of leases into operating or capital. This Statement assumes that all leases contain the element of financing. Some government contracts that transfer the right to use an asset require only a nominal amount, such as $1 per year. This represents a non-exchange transaction, which does not fall under the scope of GASB 87.
What reporting is my organization responsible for?
If you are a lessee….
If you are leasing the item, you will set up an intangible lease asset and a liability equal to the present value of future lease payments. Over the years of the lease (or useful life of the asset if shorter), you will amortize the asset. You will also reduce the liability by the principal portion of lease payments made.
If you are a lessor….
If you lease the item to another entity, you will record a lease receivable (which generally includes the same items as a lessee’s liability) and a deferred inflow at the onset of the lease. Continue to depreciate the leased asset and recognize revenue over the lease term. The lease receivable will reduce for cash received, and the deferred inflow will reduce for the revenue recognized.
Some Helpful Tips to Assist with Implementation of GASB 87
- Gather information for all outstanding leases and evaluate the terms and conditions. Identify the length of lease, the interest rate to apply, and the useful life of the asset.
- If an interest rate is not determined by the lessee, the estimated incremental borrowing rate should be used.
- Consider lease incentives, contracts with multiple components, lease modifications, and termination of leases.
- Implement retroactively by restatement for all periods presented.
- The GASB issued several implementation guides (2019-3, 2020-1, 2021-1), as well as GASB 99, that provide various clarifications on GASB 87.
- Be mindful of changes to lease agreements that may trigger an adjustment to lease liability/receivable.
GASB 91 addresses reporting of conduit debt obligations and is effective for reporting periods beginning after December 15, 2021. The purpose of this standard was to have consistent treatment and reporting of conduit debt.
Five circumstances must be present for conduit debt:
- There are at least three parties (issuer, third-party obligor, and debt holder/trusteed) involved.
- The issuer and third-party obligor are not within the same financial reporting entity.
- Debt has to stand on its own.
- The borrower, not the government, is responsible for payments.
- The borrower, not the government, receives the proceeds from the debt issuance.
Under GASB 91, the issuer does not record a liability unless they provide an additional/voluntary commitment to support debt service. Examples of additional/voluntary commitments include extending a moral obligation pledge, extending an appropriation pledge, extending a financial guarantee, and pledging the entity’s own property, revenue or other assets as security.
How does my organization implement GASB 91?
If conduit debt was previously recorded as debt within the government financial statements, most likely it won’t need to be recorded upon implementation of GASB 91. Review the agreements and evaluate whether additional/voluntary commitments are present. If not, only disclosures are required.
If conduit debt was previously only disclosed in the government financial statements, this standard should have minimal impact unless there are additional/voluntary commitments present. Be sure to visit the standard for specific disclosure requirements.
Issued in 2020, GASB 92 is an omnibus standard that addresses several issues including the effective date of lease standards (superseded by GASB 95), various post-employment benefit issues, asset retirement obligation measurement, public entity risk pools issue, nonrecurring fair value measurement issue, and terminology for derivative instruments. We encourage you to review the Omnibus if any of these items are applicable to your organization.
Two specific paragraphs from GASB 97 were effective immediately and the rest of the statement regarding Section 457 Plans was effective for reporting periods beginning after June 15, 2021.
What should my organization do to implement GASB 97?
We recommend you evaluate your Section 457 plans and determine whether they meet the definition of a pension plan. A pension plan is an arrangement through which pensions are determined, assets dedicated for pensions are accumulated and managed, and benefits are paid as they come due. If your plan does not meet this definition, then you would report it as an other employee benefit plan for accounting purposes and apply GASB 84 reporting (meaning the plan would most likely continue to NOT be reported in the government’s financial statements).
GASB 94 addresses public-private and public-public partnerships (PPP) and availability payment arrangements (APA) and is effective for fiscal years beginning after June 15, 2022. A PPP is an arrangement in which a government (the transferor) contracts with an operator to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange like transaction. If a PPP meets the definition of a lease, it should still follow GASB 87.
If a PPP meets the definition of a Service Concession Arrangement (SCA), currently you are under GASB 60. However, GASB 94 further defines an SCA as a PPP. If your government has such a transaction, be sure to visit the guidance for further explanation.
An APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction.
The government recognizes new or improved underlying PPP assets very similar to GASB 87 but with different terminology. Discuss with an audit team member if your governmental entity potentially has PPP or APA’s.
GASB 96 addresses subscription-based information technology arrangements (SBITA) and will be effective for fiscal years beginning after June 15, 2022. A SBITA is defined as a contract with a vendor that conveys control of the right to use another party’s information technology (IT) software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange like transaction. An example of SBITA would be remote access to software applications or cloud data storage.
Accounting for SBITA’s is based on the accounting for leases under GASB 87, including short-term exceptions for contracts with a maximum term of 12 months or less. A government generally should recognize a right-to-use subscription asset and a corresponding subscription liability at present value of future installment payments.
Activities associated with a SBITA are accounted for in one of three stages and the costs should be accounted as such:
- Preliminary Project State (evaluating alternatives, determining needed technology, selecting a vendor) – expensed as incurred
- Initial Implementation Stage (all ancillary charges necessary to place the subscription asset into service) – generally capitalized
- Operation and Additional Implementation Stage (Subsequent implementation activities, maintenance, and other activities) – generally expensed unless they meet specific capitalization criteria)
It is important to review all contracts and determine whether such transactions would fall under the definition of a lease, a PPP, or a SBITA and adopt the appropriate GASB accordingly.
GASB 99 Omnibus addresses a variety of topics and is applicable in various phases. These topics include:
- Financial guarantees
- Derivative instruments
- Transition from LIBOR
- Supplemental Nutrition Assistance Program (SNAP)
- Nonmonetary transactions disclosures
- Pledges of future revenues
- Updating certain terminology for consistency with existing authoritative standards
GASB 99 is applicable in various phases:
- The requirements related to the extension of the use of LIBOR, accounting for SNAP distributions, disclosures for nonmonetary transactions, pledges of future revenues by pledging governments, clarifications of certain provisions in GASB 34, and terminology updates are effective upon issuance (April 2022).
- The requirements related to leases, public-public and public-private partnerships, and SBITA are effective for fiscal years beginning after June 15, 2022.
- The requirements related to financial guarantees and the other requirements related to derivative instruments are effective for fiscal years beginning after June 15, 2023.
GASB 100 addresses accounting changes and error corrections and is effective for the fiscal year beginning after June 15, 2023. GASB 100 removes prior period adjustments from Generally Accepted Accounting Principles; clarifies, expands, and distinguishes among three classifications of accounting changes and error corrections; and provides guidance on presentation of RSI, SI, and OI when changes or corrections are made.
GASB 100 prescribes accounting and financial reporting for each category of accounting change and error corrections. It requires that:
- Changes in accounting principles and error corrections be reported retroactively by restating prior periods.
- Changes in accounting estimates be reported prospectively by recognizing the change in the current period.
- Changes to and within the financial reporting entity be reported by adjusting beginning balances of the current period.
The statement also addresses how accounting changes and error corrections should be displayed in financial statements, disclosed in notes, and presented in required supplementary information.
GASB 101 addresses compensated absences recognition and refines related disclosure requirements and is effective for fiscal years beginning after December 15, 2023. The guidance will apply to: vacation/annual leave, sick leave, PTO, sabbatical leave during which the employee is not required to perform any duties for the employer, and any other leave not specifically excluded in the guidance.
Under GASB 101, compensated absence liability is recognized for leave that: accumulates, compensation for services already rendered, and more likely than not to be used or settled. You should measure liability for leave based upon the applicable pay rates in effect at the end of the reporting period. GASB 101 amends the existing disclosure guidance and requires only the net change in the liability to be disclosed (as opposed to additions and deductions in roll forward), and you are no longer required to disclose which governmental funds are used to liquidate liability.
If you have any questions regarding these standards, please contact a member of your audit team.