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GASB 87: are you ready to implement the new lease accounting standard?
The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases (GASB 87) in 2017 and subsequently postponed the implementation with Statement No. 95 in 2020. So, while it may seem like we have been talking about the “new” lease accounting standard for years, the reality is governments are required to adopt the accounting and reporting outlined in this statement beginning with financial periods ending June 30, 2022.
Unlike some standards, implementing GASB 87 will take research and evaluation prior to completing the year-end calculations required to ensure that the financial statements and footnote disclosures are complete and accurate. The statement provides an updated definition of a lease as follows:
- A lease is a contract that conveys control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction. Control includes both the right to obtain the present service capacity from use of the asset and the right to determine the nature and manner of use of the asset
It is important to note that while the title of the standard is Leases, it may include contracts that do not identify the agreement as a “lease.” This means that governments need to evaluate contracts beyond those referred to as a lease in evaluating the implementation of this standard. Note also that GASB 87 applies to both a government’s lessee and lessor activities.
It is critical to get started now, and here is how
The first step in the overall GASB 87 implementation process is identification of contracts that meet the definition of a lease. We recommend taking the following steps:
- Identify all departments or individuals in your organization involved in contracting that may have knowledge of agreements meeting the definition of a lease
- Construct an inventory of potential leases for evaluation. This questionnaire can help in the process
- Establish who will evaluate individual contracts to determine if GASB 87 accounting is applicable
- Document the evaluation, results and any judgments made. Your auditor will want this to support that the balances recorded are complete
Once you have compiled the list of agreements that qualify as leases under GASB 87, you should determine the most efficient way to:
- Calculate the leased assets and liabilities or receivables and deferred inflows of resources,
- Calculate the annual amortization and payment schedules and
- Summarize information for note disclosures
Depending upon how many leases your organization has and how complex the contracts are, this may be accomplished with a spreadsheet. Alternatively, these tasks may require specialized lease accounting software. If you think your organization will require software, allow time in the implementation process for evaluating software providers, data extraction and input and report development and testing.
We recommend that you engage with your auditor along the way to avoid surprises at year-end about the information the auditor requires, lease classifications and support for financial reporting, including the new footnote disclosures.
GASB 87 lease identification questionnaire
The following questions are intended to assist a governmental entity in identifying potential leases that you may have. It is not intended to be all inclusive.
- Do you have any existing capital leases?
- Do you lease or rent any facilities such as office space, storage space, parking lots, etc.?
- Do you have surplus property that you lease out to others?
- Do you have equipment that is leased such as copiers, computers, etc.?
- Do you have contracts for heavy equipment or fleet vehicles that may be leases?
- Do you have facilities that are used by others who pay for the right to use those facilities?
- Do you have agreements allowing others to use “space” on your facilities such as cellular towers or pole contacts?
- Do you have agreements with third-party operators or service providers that include leased equipment within the contract?
- Do you rent space at any of your facilities to third parties for ancillary services?
- Have you considered all aspects of your organizations operations? This may include: golf course, parks, marinas, utilities, public works, housing authorities, hospitals, nursing homes, athletic facilities, airports, etc.
Please note that per GASB 87, the contract does not need to be for uninterrupted use and the implementation guide clarifies that agreements for specific days or months can meet the definition of a lease.
Once a comprehensive list of potential leases is created, they can be evaluated to determine if any meet the exceptions identified in GASB 87 and thus do not require accounting and reporting as leases.
If you have questions about implementing GASB 87, or to learn how Baker Tilly’s government accounting specialist can help your organization, contact our team.
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