Preparing for GASB 87 – Leases
The Governmental Accounting Standards Board (GASB) issued Statement No. 87- Leases, in June 2017. The previous guidance for lease accounting predated GASB and didn’t take into consideration GASB’s definition of assets and liabilities. The statement is effective for reporting periods beginning after December 15, 2019.
Summary of Changes
The new Standard is built on the foundational principle that a lease is the financing of the right to use an underlying asset by conveying control of the asset. As such, a single model for lease accounting has been established. There are no longer separate requirements for what once was an operating lease vs. capital lease. All leases will be evaluated for accounting and disclosure using a single set of criteria.
Under the new approach, certain lease assets and liabilities will be reported for agreements that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions. A lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources.
Tips to Prepare
Implementation of the new lease accounting standard will come sooner than you think. With required implementation for the fiscal years ending December 31, 2020 or June 30, 2021 it is important to begin preparing now. Here are a few tips to get you started:
- Compile a listing of all leases – The listing should be comprehensive and include all leases in which you are the lessee or the lessor. Key items to accumulate in your listing would be:
- Description of lease (building, equipment, etc.
- Lease duration (length of the lease)
- Payment structure
- Any possible renewal options
- Interest rate (if disclosed)
- Place leases into three buckets – Short Term, Transfer of Ownership, or Other. It is important to note that a bargain purchase option does not constitute a transfer of ownership.
- Short Term – These leases have a maximum duration of 12 months or less. There can be no possible options to extend the lease term. Leases that fall into this category are treated as inflows or outflows of resources based on the lease payment provisions
- Transfer of Ownership – These lease agreements transfer ownership of the underlying asset at the termination of the lease term. Agreements falling into this category are treated as a financed purchase.
- Other - Any leases not falling into the two categories above will require the reporting of the appropriate asset or liability based on the lease terms.
- Determine the lease term – Using the lease agreement, determine if there are any extensions to the lease agreement and the likelihood of exercising those extensions. This information will be needed in determining the reported value for the lease.
Only after you compile the above information can you start determining the possible effects of GASB Statement No. 87 for your organization. This is a complex standard that will require management to be proactive and involved in the implementation approach. Our team at Herbein is well versed in the new guidance and will continue working with our clients to help them prepare for implementation.
For additional information contact the author using the form below. Article written by Christopher M. Turtell, CPA.