GASB 87: Leases

Overview

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

Lease

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.

Lease Term

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

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 Accounting

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 Accounting

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.

Footnote Disclosures

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 lessor.

Subleases and Leaseback Transactions

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.