GASB 87 Will Bring Reporting Changes For Lease Agreements
Governmental Accounting Standards Board’s (GASB) Statement 87 will soon change the way entities account for lease transactions. In a move that is sure to have a lasting effect on organizations, this new single approach to accounting and reporting leases came as a result of concerns stemming from the GASB’s existing framework and definitions of assets and liabilities. Moving forward, the new statement will completely change lease measurement and recognition for government lessors and lessees, alike.
Read Also: Be Mindful Of Common Financial Statement Mishaps
Even though the new regulations won’t go into effect until Dec. 15, 2019, entities should take the time to understand the regulation and prepare for implementation immediately. To help illustrate the complexity of these changes, we’ve outlined a few of the major changes entities can expect to see beginning next December.
New Definition Of A Lease
When GASB 87 takes effect, a lease will be defined as “a contract that conveys control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange transaction.”
To find out if “control” occurs, governments will need to determine if it has both the right and the capability to use a specific asset. Additionally, governments should consider how the asset will be used during the contracted period of time.
Additional Lease Category With Reporting Rules
Under the current rules, leases are categorized as “operating” or “capital.” But when GASB 87 takes hold, entities will be faced with three categories for lease agreements, they are:
- Contracts That Transfer Ownership: If an asset’s ownership is transferred to the lessee before the end of the contract, the lessee should report it as a financed purchase of the asset. The lessor, on the other hand, should report it as a sale of the asset.
- Short-Term Leases: These leases have a term of 12 months or less. Month-to-month leases are also included in this category. Leases in this category should be recorded as expenses or revenue by the lessee or lessor.
- All Other Leases: Any arrangement that doesn’t qualify as one of the other categories will be put into this new category with regulations for both lessors and lessees.
- For Lessee Governments: Following the end of the lease term, lessees should distinguish a lease liability and an intangible asset representing the right to use the leased asset. Lessees must also record amortization expenses from the use of the asset during the lease and offer periodic interest expense on the lease liability.
- For Lessor Governments: At the end of the lease term, a lessor is required to identify a lease receivable and a deferred inflow of resources. With that, a lessor must also systematically report lease revenue over the term and the periodic interest revenue from the receivable.
Develop A Plan Of Action
Even though Dec. 15, 2019, seems like it’s a long way off, but it will be before you know it. Don’t get caught off guard. Consider how GASB 87 will impact your entity and identify a plan to ease you into the transition.
This article touches on a few of the major considerations entities will be faced with as a result of statement 87, but it only just scratches the surface. Give me a call or email a member of Rea’s government services team to learn more about GASB 87 and how you can prepare your entity for implementation. Failure to develop a plan of action today could put you in a serious disadvantage tomorrow.
By Zac Morris, CPA (Millersburg office)