Steven J. Cohen Principal, CPA, CGFM
12 July 2021
In June 2017, the Government Accounting Standards Board issued GASB Statement Number 87 (GASB 87), Leases. It is effective for fiscal years beginning after June 15, 2021 – this translates to the year ending June 30, 2022 for June year ends and December 31, 2022 for calendar year ends.
Prior to the implementation of GASB 87, an asset and a liability is recognized on the balance sheet for capital leases, while operating leases do not have recognition on the balance sheet. Any arrangement that meets the definition of a lease would recognize an asset and a liability on the balance sheet unless it meets an exclusion in GASB 87. Therefore, the distinction between capital and operating leases is eliminated.
The definition of a lease under GASB 87 is the following: “A lease is defined as a contract that conveys control of the right to use another entity’s non-financial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.” Examples of lease consist of land, building, equipment, and vehicles.
Exclusions to recognize a lease under GASB 87 include:
- Intangible assets such as patents, software, and copyrights
- Biological assets such as timber, living plants and animals
- Service concession arrangements
- Conduit debt
- Arrangements which have a maximum possible term at the beginning of lease of 12 months or lease
- A lessor is not required to capitalize arrangements in certain leases that are subject to external laws, regulations, or legal rulings on its balance sheet – please review GASB 87 as this exclusion is highly specific.
Arrangements between related parties require careful attention as GASB 87 states that substance of the transaction is more important than legal form for contracts designed to circumvent the lease definition.
The financial reporting for both the lessor and lessee can be viewed on charts to the right.
Measurement of the liability for the lessee includes the following: fixed payments, variable payments that depend on an index, variable payments that are fixed in substance, amounts reasonably certain to bepaid by the lessee under residual value guarantee, exercise price if it is reasonably certain that the purchase option will be made, payments for penalties, any lease incentives from the lessor, Any other payments that are reasonably certain of being required based on an assessment of all relevant factors . It would exclude variable payments based upon future performance or usage of the underlying asset. Measurement of the asset for the lessor would be similar to the calculation for the lessee.
The discount rate for the calculation would be the interest rate charged by the lessor or the estimated incremental borrowing rate for a similar transaction if the rate charged by the lessor is not known.
Suggestions to prepare for the implementation of GASB 87 include review of recurring payments, discussion with members from other departments, review of inventory and updating of policies and procedures.