Avoiding the hurdles of GASB 87 implementation
Tribes and tribal enterprises are currently navigating the implementation of the Governmental Accounting Standards Board Statement No. 87 (GASB 87). For those wondering “what is GASB 87?”, it's a new lease accounting standard that significantly changes how governmental entities report leases in their financial statements. The GASB 87 effective date is for fiscal years beginning after June 15, 2021. This means that all June 30, September 30 and December 31 year-end closings for 2022 are at various stages of implementation, impacting GASB lease accounting practices across the board.
For those who have not yet completed the implementation process, here are some common pitfalls to avoid in lease identification, analysis and calculation, along with some GASB 87 examples:
Gathering leases
The most time-consuming aspect of GASB 87 compliance that management faces is gathering leases. A lease contract is best described as an agreement that conveys the right to use an asset for a period of time in exchange for consideration.
Often, when using the general ledger to help identify leases, accounting teams have noted that they don’t have the current leases on file or that the signed lease is missing from accounting records. This can complicate the process of lease recognition and measurement.
While some leases are obvious for your analysis, such as equipment and vehicle leases, consideration should be given to others too. For example, billboard marketing, soda fountains with service contract requirements and stadium suite leases may need to be examined as potential lease assets.
If a contract conveys the right to use the asset for a period of time in an exchange or exchange-like transaction, you’ll want to include that in your analysis of lease contracts.
Lease analysis
During the analysis of the leases, be sure to check for anything that may be disqualified. This step is crucial for proper lease classification under GASB 87.
A lease can be disqualified for capitalization under GASB 87 if it includes clauses such as:
- Transfer of ownership.
- Variable payments based on usage, including for copiers based on the number of copies made or percentage of coin-in for gaming machines.
- Software license agreements (those are considered under GASB 96, which is effective for years ending after June 15, 2022, but are excluded for consideration under GASB 87).
However, short-term leases under one year that contain the ability for either party to cancel without the other party’s approval will continue to be expensed. A common example of a GASB 87 short-term lease for casinos is gaming machine leases, which often have a six-month term that renews monthly and can be cancelled by either party with 30 days’ notice. These lease options need to be carefully considered in the context of GASB 87 lessor accounting and lessee accounting.
Completing calculations
Once the lease analysis is completed and documented, completing the calculations is the next step. This involves determining the lease liability and lease asset for each qualifying lease.
Many leases don’t have a stated interest rate, so the tribe’s or tribal enterprise’s incremental borrowing rate should be used to calculate the present value of lease payments. This is a crucial step in lease measurement under GASB 87.
One common issue that tribes are facing is getting a stated rate from their lenders. If you can’t get a stated rate, use an interest rate of current debt or the borrowing rate of the tribe or tribal enterprise instead. This rate will be used to calculate the present value of future lease payments, which forms the basis for both the lease asset and lease liability.
For stadium suite leases, do not include food service or maintenance costs as part of the asset cost calculation. With gaming machine leases, any sweeteners such as kiosks or ATMs included for free are part of the value. These considerations are important for accurate lease recognition and measurement.
Once the asset values have been calculated, management needs to determine if capitalization is necessary. Capitalization occurs if the asset is either quantitively material to the financial statements or qualitatively material to the notes on the financial statements with the GASB 87 disclosures.
If management determines that the assets are neither quantitively nor qualitatively material, they can pass on capitalizing the assets. A discussion with your auditor can help with the documentation process and expediate the auditor’s review. This step is crucial for ensuring proper lease disclosures in financial reporting.
GASB 87 journal entries and accounting considerations
Implementing GASB 87 requires new journal entries to record lease assets and liabilities. For lessees, this typically involves debiting a right-of-use asset and crediting a lease liability at the commencement of the lease term. Subsequent entries will record lease payments, amortization of the lease asset, and interest expense on the lease liability.
For lessor accounting under GASB 87, the initial entry usually involves recognizing a lease receivable and a deferred inflow of resources. Over the lease term, the lessor will recognize lease revenue and interest revenue related to the lease receivable.
It's important to note that these GASB 87 lessee journal entries and lessor entries can vary based on specific lease terms, modifications or incentives. Proper lease amortization schedules should be maintained to help ensure accurate financial reporting throughout the lease term.
How Wipfli can help
Wherever you are in your implementation process, Wipfli is here to help. Our team can assist you in determining which leases qualify under GASB 87 as well as calculating the asset values and creating the necessary journal entries. We can also help with lease reassessment and addressing any lease modifications that may occur over time.
Sign up to get more information in your inbox, or continue reading:
