Introduction to GASB 87
The GASB lease accounting standard
In 2019, the latest Governmental Accounting Standards Board (GASB) lease accounting standard, GASB 87, began to go into effect for most U.S. state and local government agencies, including certain health care, and higher education institutions. Among other requirements, GASB 87 required that most leases be capitalized and recorded on the balance sheet, changed how they’re reported, and eliminated most operating (non-capitalized) leases.
Preparing for lease accounting under GASB 87
While the decision to lease or purchase an asset is not new, the accounting and financial reporting implications of the decision are changing. The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, which outlines new requirements for governmental entities when it comes to lease accounting. GASB 87 is effective for fiscal years beginning after June 15, 2021.
Why the GASB 87 standard was introduced
GASB 87 was created to better meet the information needs of GASB financial statement users by improving accounting and financial reporting for leases by governments. GASB 87 increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. Under the standard, state and local government organizations are required to capitalize most leases on the balance sheet — reporting them as right-of-use assets and lease liabilities. The standard establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. As a result of the shift, capitalized lease obligations face increased auditor scrutiny, pushing companies to focus on ensuring accuracy and completeness of what they report as well as leading to greater transparency and comparability of financial statements.
The major changes for lessees
The most notable change is the elimination of the operating lease classification. Under GASB 87, all leases, excluding those that transfer ownership of the underlying asset to the lessee and short-term leases are treated as finance leases. The lease assets and liabilities are recognized on the statement of financial position, which may result in a significant increase in the amount of assets and liabilities many companies report. Under GASB 87, all leases expenses are reported as a separate (usually straight-lined) amortization expense of the asset and a declining interest expense based on the liability being reduced with periodic payments.
The major changes for lessors
To comply with GASB 87, lessors need to record discounted rents receivable along with the related deferred revenue. In other words, a lessor now must record the expected rents receivable over the life of the lease. These amounts are discounted using the appropriate interest factor. A lessor must accrete into income and reduce the deferred revenue balance sheet amount each period. While simple, straightline payment structures make these calculations easier, many lease terms have variable or rent payments that increase over time, making it more complex to calculate future rents.
Many GASB lessors are also GASB lessees for the same property. Take for example a municipality that leases a building from an unrelated third-party (lessee accounting) and then subleases a portion of that building to another party (lessor accounting). These common scenarios need to be reflected properly in the accounting, given that the length of term used might be different for the lessee component versus the lessor component, discount rates might be different, and the disclosure requirements are much more robust than ever before.
GASB 87 lease accounting standard summary
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Understanding the technical requirements of GASB 87
Get the details on the accounting changes for the GASB 87 standard in this easy guide.