Wipfli logo
Insights - Articles, Blogs and on-demand webcasts

Articles & E-Books


How GASB 87 changes leasing for tribal casinos

Jan 23, 2020

Leases are starting to make the headlines. Because leased assets are increasingly being recognized as off-balance sheet financing, regulators are setting the record straight with accounting standards.

In 2016, the Financial Accounting Standards Board (FASB) released Update No. 2016-02, Leases (Topic 842). Non-governmental organizations have to start following this standard by the calendar year 2021. Although tribal gaming operations are not affected, you might hear it referenced by your bank, financers or counterparts in commercial gaming.

It’s the Governmental Accounting Standards Board (GASB) guidance that has the real impact on you. GASB Statement No. 87 — which must be followed by tribal gaming organizations and is effective for calendar year 2020 — is what we’ll be focusing on below.

Leasing basics: Capital lease vs operating lease

But first, some lease background. Traditionally, leases have belonged to two groups: capital leases and operating leases.

In a capital lease, the organization owns the asset at the end of the lease term or is able to pay a nominal fee to buy the asset. Other qualifying factors can include:

  • The term of the lease is greater than or equal to 75% of the useful life of the asset; or
  • The present value of the lease payments is greater than or equal to 90% of the asset’s fair-market value

In an operating lease, the organization returns the asset to the lessor at the end of the lease term.

If you pay $1,000 per month for a capital lease and $1,000 per month for an operating lease, your profit and loss statement would show $1,000 operating expense for the operating lease.

But what about the capital lease? Your profit and loss statement might show $80 in interest expense and $200 in depreciation expense. And the answer to where the other $720 went is two-fold.

The $720 is a combination of $920 in debt payments and a $200 reduction in the value of assets on the books. These are both on the balance sheet, where operating leases are completely omitted. Thus the argument for “off-balance sheet financing” was born. 

GASB 87 is changing leasing in tribal gaming

In tribal gaming, the most common capital leases are for photocopiers and kitchen equipment. Operating leases tend to be far more common for the average casino. These include slot machines, card shufflers, vehicles and land leases. While capital leases for slot machines used to be more common, practice has shifted to financed purchases and lease arrangements.

Even the largest casinos are shifting to fewer owned games and more leased games. And it’s not hard to see why. The all-in fee paid to game vendors usually contain a service component above the costs of the cabinet and game software. Most arrangements take a fixed percentage of the net win, while some incorporate a daily minimum fee. Additionally, the vendor may reimburse state compact fees and slot system connection fees, provide for a chair allowance, or share promotion costs.

Leases give greater flexibility to operators and greater incentive to vendors to deliver games that perform.

In reaction to this evolution of practice, the reporting model is changing, too. The goal is to provide more transparency on these leasing arrangements. GASB 87 affects both the numbers on the financial statements and the required disclosures in the notes.

What is GASB 87 changing?

To simplify things, the new approach by GASB 87 is basically to treat operating leases more like capital leases and capital leases more like financed purchases.

There are specific exemptions from the No. 87 standard, including licensing contracts for computer software, as well as leases of slot software, accounting systems, server software and other similar assets. These things will be addressed in future guidance.

But let’s focused on what’s changed.

Short-term leases (which have a maximum possible term of 12 months), must be treated as operating leases. Their costs (or revenues) should simply flow through the profit and loss statement.

Similarly, lease payments that are based on the underlying asset’s performance (e.g., a slot machine) are recognized only in the profit and loss statement. 

For example, an 80%/20% arrangement, with no minimums, would continue to be recognized as an operating expense. The variable payment amount must be disclosed in the financial statements notes.

Leases that are not short-term and contain a fixed amount must be added to the balance sheet. This includes an 80%/20% arrangement, with a daily minimum of $20. This may also include shuffler leases, vehicles, technology hardware or offsite office space.

It’s important to note that the present value of future lease payments must be added as both an asset and a liability to the financial statements.

Now, each of the three elements that make up financial statements answers a different question in the context of leases.

  • Balance sheet: What is the present value of the leased asset, and how much is still owed?
  • Profit and loss: What is the cost of the asset, as recorded on the same basis as assets owned?
  • Cash flow: What is being paid to be able to use the leased asset?

Previously, a casino’s financial statements presented only the cost and what is paid as aggregated numbers, along with other operating expenses. GASB 87 adds in the present value and separates the disclosures related to the cost in the notes to the financial statements.

Why do these GASB 87 changes matter?

Leases are a large and growing expense for casinos. In fact, they’re often the second largest category of expenses, behind payroll. Changing the reporting framework can completely change the way your financial statements look, which may cause issues with obtaining financing, reporting on existing debt covenants, changing profitability figures and altering financial ratios.

And while GASB 87 must be implemented for 2020, it also impacts 2019. 

The National Indian Gaming Commission requires casinos to present comparative financial statements, and the GASB requires retroactive restatement of all prior periods presented. This means that 2020 audited financial statements must present 2019 numbers as if the new lease standard were already implemented. 

Accordingly, if you choose to adopt the standard for your casino’s 2019 financial statements, you must restate 2018 to present comparative statements.

Debt-service coverage ratios

Moving assets and liabilities onto the balance sheet also impacts debt covenants, particularly the debt-service coverage ratio.

When you add back a lease payment to the net operating income in the numerator and add that same amount to debt service in the denominator, you get a lower ratio. The ratio continues to decrease as more leases are changed from operating expenses to lease liability payments. This could cause issues in meeting specific ratio targets.

Other financial ratios will also be impacted., and each casino will need to evaluate the ratios used by management and other stakeholders to determine this impact. Ratios may no longer be comparable to prior periods or industry benchmarks.


Lastly, profitability will also be impacted by GASB 87. 

Amortizing lease liabilities and related interest means that the expense is now greatest at the beginning of the lease term. Interest expense will then gradually reduce until the end of the lease term, meaning that profitability will be lower in the beginning of lease terms.

Your GASB 86 implementation guide

GASB 87 goes into effect this year, and it’s not too late to get started. Here’s what you need to do:

  1. Identify all leases within your casino.
  2. Establish a materiality threshold and discuss it with your auditors and regulators. Document your considerations.
  3. Evaluate and document individual leases for proper accounting. Be careful in assuming slot machine leases have indeterminable values. Consider the impact of master lease agreements. And don’t forget to net incentive payments received/paid against the lease.
  4. Evaluate how implementing GASB 87 will impact debt covenants. Proactively work with lenders to renegotiate restrictive covenants (if needed). And educate regulators and governance bodies on changes in financial ratios.
  5. Implement an accounting review for future lease commitments.
  6. Annually review leases for remeasurement considerations.

If you have any questions about GASB 87 and how it affects your casino operations, contact Wipfli for help. Or continue reading on in these related articles:

3 big ways the new GASB standards affect tribal governments

Clean up your casino’s vendor management: Reduce costs, mitigate risk and increase vendor relations

Top 3 benefits of simplifying your chart of accounts across casino properties


Wipfli logo square

Wipfli Editorial Team