Since the GASB issued Statement No. 87 — Leases back in 2017 but delayed implementation until 2022 for most entities, the changes may have fallen off your radar. The implementation date for the GASB 87 is fast approaching, here is some information to make sure you’re ready.
The primary change resulting from the new lease standard is the recognition of a liability and an asset for arrangements previously classified as operating leases, which were recognized as expenditures by lessees and income by lessors.
GASB 87 defines a lease as a contract that conveys the right to use another entity’s nonfinancial asset specified in the contract for a period of time in an exchange or exchange-like transaction.
Lease accounting differs for each of the following three contracts:
Short-term leases: These leases have a maximum term of 12 months, including any options to extend, regardless of the probability to do so. Short-term leases are accounted for as an inflow or outflow of resources for the lessor or lessee government, respectively.
Contracts that transfer ownership: These contract do not contain termination options, not including fiscal funding clauses as long as they are not reasonably certain of being exercised.
Right-to-use-leases: All other leases fall under the category of right-to-use leases.
One of the key changes is that GASB 87 requires the lessee government to recognize a lease liability and intangible “right of use”’ asset at the commencement of the lease. The liability is measured as the present value of all payments expected to be made during the lease term. The discount rate used to calculate the present value of all payments is the agreement, if present, and the entity’s implicit borrowing rate, if not. The intangible right of use asset should be amortized over the shorter of the useful life of the underlying asset or the lease term. Amortization expense can be combined with depreciation expense for capital assets.
The lease term is defined as the period which a lessee has a noncancellable right to use an underlying asset, plus:
Any lessee’s options to extend when it is reasonably certain the lessee will exercise this option.
- Periods covered by the lessee’s option to extend when it is reasonably certain the lessee will not exercise this option.
- Periods covered by the lessor’s options to extend when it is reasonably certain the lessor will exercise this option.
- Periods covered by the lessor’s option to extend when it is reasonably certain the lessor will not exercise this option.
Required disclosures include a general description of leasing arrangements, total amount of lease assets recognized, related accumulated amortization, disclosed separately from depreciation expense from capital assets, amounts of lease assets by major classes, disclosed separately from other capital assets, and principal and interest payments disclosed in each of the next five fiscal years, and in five-year increments thereafter.
Implementation is full, retrospective review, with prior period differences reflected in the earliest year presented.
This statement is similar to many of the provisions of the Financial Statement Accounting Board’s Topic 842, but there are a few key differences.
GASB 87 takes in to account the effect of fiscal funding clauses, which could affect government lessees and their lease terms, if funding for the lease is not appropriated.
The other key difference has to do with the discount rate. One of the expedients provided for by Topic 842 in the year of adoption is the use of the risk-free rate in lieu of the incremental borrowing rate. GASB concluded lease obligations are not risk free and therefore the risk-free rate would not be an appropriate discount rate for lease obligations.
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