Introduction to GASB 87 LeasesBy Warren Ruppel | May 29, 2018
The Financial Accounting Standards Board (FASB) is not the only standard-setting body to address updates to lease accounting procedures. State and local governments and governmental entities need to be aware of a similar standard that was issued by the Governmental Accounting Standards Board (GASB). Similar in concept to the FASB standard (discussed on page 4), GASB 87 Leases contains some significant differences.
The new GASB lease standard will be effective beginning with calendar year 2020. While that seems a long way off, implementation of this standard will be extremely challenging and time-consuming for governments that have even a moderate number of leases. By far the largest impact will be on the government-wide financial statements and financials prepared on a proprietary basis. The purpose of this article is to help readers understand why this standard was issued and to encourage a sense of urgency in preparing for its implementation.
The GASB views all leases as financing transactions. The best way to understand why the GASB (and for that matter, the FASB) addressed lease accounting is this very simple example of buying or leasing a car. Let’s say you buy a car and take out a loan to finance the purchase. Most agree that recording the car as an asset and the loan (net of any down payment) as a liability is sensible accounting. Now let’s assume you lease the car for three years. Under current Generally Accepted Accounting Principles (GAAP), the only accounting recognition is for the monthly lease payment, which is recorded as an expense. But think about it – are you any less obligated to make the monthly lease payments than you are to make the monthly loan payments? Of course not. So, why isn’t this liability recorded? Good questions – hence, GASB 87.
Under GASB 87, all the monthly lease payments, discounted to reflect the time value of money, would be recorded as a liability. But what would be the debit? It doesn’t seem logical to record an expense in the period that you signed the lease, since you get to drive the car for the next three years. Under GASB 87, you would record a “right-to- use” asset which would be amortized over the life of the lease. Since you are amortizing the asset and paying down the liability, at the end of the lease, both the asset and liability accounts would be zero.
Now let’s say the government is the car leasing company (lessor) in this transaction. The lessor government would record a receivable for the present value of the lease payments that it will receive, along with a corresponding amount as a deferred inflow of resources. And the lessor would also keep the car on its books as asset. Keep in mind that this lessor accounting is a significant departure from the FASB standard. The good news is that, unlike the FASB, the GASB does not distinguish between financing and operating leases, so governments will not need to make that distinction.
HERE’S WHERE IT GETS COMPLICATED
The above requirements seem very straightforward and unlikely to stir a sense of urgency in preparing for implementation. However, there are additional circumstances covered by GASB 87 that increase its complexity, such as:
• If the lease term has a renewal option, should the renewal period be considered part of the lease term in calculating the liability or receivable?
• If the lease has a termination clause, should the lease term be the shorter period?
• What if there is a fiscal funding clause that allows the government to cancel the lease each year?
• What if there is a bargain purchase option at the end of the lease?
What if certain payments under the lease are variable?
• What if there are negotiated changes that occur during the lease term? Should the balance sheet accounts be adjusted?
• If interest rates increase, should the discount rate used to calculate present value be adjusted?
• How should lease incentives, such as free rent periods or build-out allowances, be handled?
• If the lease contains multiple components, such as an office lease that includes an amount for maintenance, should the multiple components be accounted for separately? (Yes)
• If maintenance is provided but an amount for maintenance is not specified, how would the contract price be allocated?
Future editions of the Marks Paneth Nonprofit & Government Times newsletter will discuss various aspects of these implementation questions, but readers should read all 84 pages of GASB 87 before implementation begins.
Before governments embark on a full scale implementation project, it would be wise to take a representative sample of the various types of leases that the government enters into, perform the calculations required by GASB 87, and then let the government’s independent auditor “audit” these calculations to make sure both parties are on the same page as to how the calculations are being done and whether they take into account all the required considerations.
About Warren Ruppel
Warren Ruppel, CPA, is a Partner within the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. He has over 40 years of experience in accounting and auditing services for governments and nonprofits. Prior to joining the firm, Mr. Ruppel served as the Assistant Comptroller for Accounting of The City of New York, where he was responsible for all aspects of the City’s accounting and financial reporting. He was also the Secretary of the City’s... READ MORE +