GASB Statement No. 87, Leases
What is GASB 87?
GASB 87 is the new lease accounting standard issued by the Governmental Accounting Standards Board, GASB. This new standard supersedes GASB 13 and GASB 62.
The goal of the new lease accounting standard is to:
More accurately portray lease obligations
Increase the usefulness of governmental financial statements
This article will walk through the key changes under the lessee accounting model for GASB 87 and provide a comprehensive example of lessee accounting under GASB 87. It will also discuss some basic differences between lessee and lessor accounting.
GASB 87 effective date
The new GASB lease accounting standard for governmental organizations, GASB Statement No. 87, Leases (GASB 87), was proposed during 2017 and released in June of 2017. It was initially effective for reporting periods beginning subsequent to December 15, 2019.
In May 2020, the GASB issued Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance, which delayed the GASB 87 effective date by 18 months. This pronouncement now requires the adoption of GASB 87 for all fiscal years beginning subsequent to June 15, 2021.
However, the requirement to restate all prior periods presented, if practicable, remains. Due to this requirement, organizations should ensure preparedness to comply with GASB 87 for the fiscal year prior to adoption.
GASB 87 lease classification
The main differentiator between GASB 87 and the prior GASB guidance relates to lease classification, previously a key component to determining recognition in the financial statements. Under GASB 87, a single model approach exists, meaning a distinction between operating and capital leases no longer exists. GASB 87 now requires all agreements meeting the definition of a lease to be classified as finance leases.
The finance lease classification is a similar designation as the capital lease classification under the current GASB standard, just with a fresh nomenclature. The accounting treatment of a finance lease remains similar to the accounting treatment of a capital lease.
Accordingly, the majority of lease obligations will now be reflected as liabilities and assets on the statement of financial position. Lease payments will have a portion that reduces the lease liability and a portion that flows through the statement of activities as interest expense. A corresponding lease asset will also be recorded in the statement of financial position, which will be amortized over the lease term or the useful life of the underlying asset, whichever is shorter.
What is considered a lease under GASB 87?
With the new standard having such a profound impact on governmental financial statements, it is important to carefully review what exactly is considered a lease when conducting an inventory of leases.
Under GASB 87, a lease is defined 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.” GASB 87, paragraph 4
The verbiage in this definition must further be dissected in determining what constitutes a lease under the new standard. GASB 87 defines “control” as
“the right to obtain present service capacity and the right to determine the nature and manner of use.” GASB 87, paragraph 5
GASB 87 defines the scope of leased assets as non-financial assets, such as land, buildings, equipment, and vehicles. Certain non-financial asset-based lease agreements are out of scope, such as:
Leases of intangible assets
Leases of biological assets
Inventory leases
Supply contracts
Service concession arrangements
Other certain agreement types, such as assets financed with outstanding conduit debt
Additionally, all short-term leases with a maximum noncancelable term of 12 months or less, regardless of whether all noncancelable terms (e.g., renewals) are expected to be exercised, can be excluded from recognition on the statement of financial position.
These definitions must be considered when assessing what contracts are to be recognized as leases.