Did you miss the recent GFOA webinar on GASB 87 Implementation Guide?
Here are the highlights…
Effective Dates: The reporting requirements are effective for reporting periods beginning after June 15, 2021 and should be applied retroactively with prior periods restated as appropriate. GASB 87 will be effective for year ends of December 31, 2022, June 30, 2022, etc.
Terminology: Previously, there were operating and capital leases. Now, there are “Leases” or “Leases under 87”.
Under GASB 87, leases are considered a financing activity for the right to use another entity’s asset(s).
GASB 87 defines specific reporting requirements for short-term leases and contracts that transfer ownership of the underlying non-financial asset. The definition of “short-term” remains as an initial term of 12 months or less, including any options to extend. Contracts that transfer ownership are identified by the transfer of ownership of the underlying asset at the end of the lease contract.
The standard defines specific exclusions for leases for:
- Intangible assets
- Biological assets
- Inventory
- Service concession arrangement as defined in GASB 60 Paragraph 4
- Underlying assets that are financed with outstanding conduit debt – unless both the asset and debt are reported by the lessor
- Supply contracts, such as power purchase agreements
Lessee and Lessor value calculations are similar to each other as well as how the value was calculated for “capital leases."
Lessee – recognize a lease liability and an intangible (right-to-use lease) asset at present value.
- Liability reporting is similar to how debt/financing is accounted for – which is different for full accrual versus modified accrual
- Lease asset value starts as the lease liability value, plus any payments made prior to the contract, less any lease incentives, plus any initial direct costs
- Lease asset amortization should be calculated based on the shorter of the life of lease or the underlying asset
- Re-measurement of lease only needed in specific circumstances
Lessor – recognize lease receivable and deferred inflow of resources at present value (generally the same as the lessee amount).
- Deferred inflow is calculated at the beginning of the lease as the present value of lease payments less provision for estimated noncollectable amounts
- Subsequently, recognize deferred inflow of resourced and inflows of resources (revenue) over the term of the lease
- Subsequent periods amortization of the discount on the lease receivable and inflow of resources (interest revenue) is recorded
- Payments should first be allocated to accrued interest receivable and then to the lease receivable
- Lessor should keep underlying asset on the books
- Exception for leases of assets that are investments as defined in S72 and for leases that are subject to external laws, regulations or legal rulings (like Federal Aviation Administration)
Note Disclosures:
Lessee - The notes to financial statements should include a description of leasing arrangements, the amount of lease assets recognized, and a schedule of future lease payments to be made.
Lessor – The notes to financial statements should include a description of leasing arrangements and the total amount of inflows of resources recognized from leases.
Other items covered in GASB 87:
- Lease incentives
- Contracts with multiple components
- Contract combinations
- Lease modifications and terminations
- Sale-leaseback transactions
- Lease-leaseback transactions
- Intra-entity leases
The Implementation Guide No. 2019-3, Leases is now available from GASB.
