Lease accounting has been executed in a certain way for the past several years. However, GASB 87 will bring about multiple changes to how governmental entities will account for leases moving forward. Keep reading to learn more about GASB 87, the changes it will bring for lessees and lessors, and how your organization can make a successful transition to this new GASB lease standard with the help of Crowe lease accounting services.
What is GASB 87?
The Governmental Accounting Standards Board (GASB) Statement No. 87 issued in June 2017 revises existing lease standards and establishes a single model for lease accounting. The revision is based on the principle that leases are financings of the right to use an underlying asset.
Under previous guidance, leases could be presented as either capital leases or operating leases. The new guidance will increase the comparability and usefulness of information and reduce complexity for preparers. GASB 87 aligns with leasing standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). It will be effective for reporting periods beginning after Dec.15, 2019. Early application of the new GASB lease accounting standard is encouraged.
Understanding GASB 87 leases
GASB 87 introduces the new definition of a lease as a contract that conveys control of the right to use another entity’s nonfinancial asset (an underlying asset such as buildings, land, vehicles, or equipment) as specified by the contract for a period of time in an exchange or exchange-like transaction. Control requires both the right to obtain the present service capacity from the use of the underlying asset and the right to determine the nature and manner of use of the underlying asset. Control is not limited to contracts that convey substantially all of the present service capacity from use of the underlying asset.
The standard does not apply to leases for the following:
- Intangible assets such as mineral rights, patents and software, and copyrights
- Biological assets such as timber, living plants, and animals
- Service concession arrangements
- Assets financed with outstanding conduit debt, unless the lessor reports both the asset and the conduit debt
- Supply contracts such as typical power purchase agreements
However, if an entity leases an asset and it creates an intangible right-to-use asset under the new GASB lease standard, subsequent subleasing of that asset would require the application of GASB 87.
The lease term starts with the noncancelable period, plus periods covered by options either to extend the lease if the option is reasonably certain of being exercised or to terminate the lease if that is reasonably certain. The lease term excludes cancelable periods, and fiscal funding or cancellation clauses are ignored unless it is reasonably certain they will be exercised.
A short-term lease is one that, at the beginning of the lease, has a maximum possible term under the contract of no more than 12 months, including any options to extend. For short-term leases, lessees recognize lease payments as expenses in their reporting, and lessors treat lease payments as revenue.
Changes under the new GASB 87 lease accounting standard
GASB 87 affects how lessees and lessors account for and report leases in their financial statements. The following exhibit provides a brief overview of the approaches for leases under the new GASB lease standard:
GASB 87 changes for lessees and lessors
|Recognition and measurement||
|Subsequent recognition and measurement||