GASB 87 Update: Lease Accounting
A year and half from now, governmental entities will be reporting leases in accordance with GASB Statement No. 87 (GASB 87 Update: Lease Accounting which is first effective for June 30, 2021, year ends). While it may seem like a long time, the time and effort needed to prepare for implementation will be significant for many entities, and that time is rapidly approaching. For that reason, we’ve laid out five key steps to follow as you begin implementing this standard, with items to consider, and important things to look for:
1: Establish a Timeline with Milestones
With the time to implement getting smaller and smaller, a timeline should be established with key milestone dates, key contributors and project leaders should be identified, and buy-in from key stakeholders should be obtained. Having a point person for the project will be important so people involved in implementation who to go to for everything and who will be responsible for gathering all information.
2: Identify your Leases
The first step in evaluating the future impact of this new standard is to identify all of your entity’s leases. Remember, this will apply to both lessee AND lessor arrangements.
While all significant lessee agreements should already be disclosed in the financial statements, use this opportunity to make sure this is really the case.
We recommend taking several actions in order to identify all applicable agreements. In addition to reviewing the current disclosures, you might want to search board/council minutes, reach out to department heads and management, and scan cash disbursements. This will be a challenge in working with a potentially wide range of departments and people, and having to explain to them why they have to do this, when they are not accountants. For them it will feel like added work with little to no benefit.
When you’re doing this, identify all potential lease arrangements, even if the agreement isn’t called a “lease.” Keep in mind that not everything labeled a lease will meet the GASB 87 definition, whereas, other arrangements not referred to as leases will. The GASB defines a lease as “a contract that conveys control of the right to use another entity’s nonfinancial assets (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.”
Don’t underestimate the effort required to identify your potential lease arrangements. For many organizations, this process could require a significant investment of your people’s time. Also keep in mind you will want to document this process, as it something you will need to do to some extent annually to identify to any new leases, or leases that have been terminated.
Step 3: Gather the data
Once you’ve identified the population of leases, the next step is to accumulate the necessary information. The best source will be the lease agreement, but depending on how long ago it was executed, it may take time to locate. Additionally, there could be subsequent extensions, amendments, or supplemental schedules to the agreements. When you gather these agreements you will to ensure you have a central gatekeeper for all of these and one place to store all of this information.
The key things to be looking for and obtain from these agreements would be:
- Noncancelable Lease Term
- Potential Options to Extend or Terminate
- Payment Terms (Fixed Payments)
- Variable Payments (Excess Use Charges, Payments based on CPI Index, etc.)
- Any Service or Maintenance Package payments
- Interest/Discount Rate
- This may tough to identify in many agreements, and as an alternative you can use the incremental borrowing rate, which as an example would be the interest rate on a loan you would be charged by the bank to purchase on asset
Step 4: Compile the Data together and Perform Calculations
Now that you have gathered all the necessary information, you will want to schedule everything out in an understandable format to easily perform the necessary calculations. The easiest way would be to schedule all the information out on an excel sheet with a row or column for each lease. This will help see everything laid out, will help identify any missing information or incorrect information, and will be easy to update each year. Once you have this you will need to calculate the present value of the lease liability or asset to determine what will need to be established on your financial statements. Remember, this is applied RETROACTIVELY meaning you will need to perform the calculations as of the beginning of the lease term, with the activity through July 1, 2020 being recorded as a prior period adjustment.
Step 5: Prepare for Implementation of GASB 87 Update: Lease Accounting
As your entity’s implementation date nears, the time will come to formulate journal entries and footnote disclosures. Here’s where your work in steps 2 and 4 will pay off. First, perform a final verification that all of the agreements meet the GASB 87 definition of a lease. Then, calculate the present value of future lease payments. Lessees will record a lease liability for the future payments and a lease asset for the right to use the underlying asset. Lessors will record a lease receivable and deferred inflow of resources.
It is key to familiarize yourself with the language in the standard and key provisions and definitions. GASB has issued Implementation Guide No. 2019-3 which answers many questions about to how to apply the provisions the statement, and addresses some areas that may not be as clear. Some questions that have not completely been addressed are:
- What if the lease doesn’t have any specific term or end date?
- What if there is not a fixed minimum payment in the lease?
As you review your agreements, more and more questions and situations will come up, that each will need to evaluated separately, and will take a level of judgement and working with consultants and external auditors for guidance.
Have more questions? Let us know how we can help!
LSL’s GASB Update 2020
Additionally, click HERE if you are interested in attending LSL’s GASB Update 2020. Brandon and other LSL Government Team Members will be discussing different GASB Updates, as well as, providing examples of how these changes will affect the accounting government financial officers.
Stay tuned for more GASB Updates!
