In the coming years, balance sheets of many governments and businesses will change dramatically as the new GASB and FASB lease standards come into effect. GASB began working on new lease standards just as FASB and IFRS were wrapping up theirs, so it shouldn’t be a surprise that GASB’s lease standard, codified as Statement 87 – Leases, closely resembles the FASB standard, ASU 2018-11 Leases (Topic 842) – Targeted Improvements.
However, there are a few key differences. Let’s take a look at how they’re similar and how they differ.
How are They Alike?
Under both of the previous standards, operating leases were only disclosed in the financial statement notes, so it was easy to overlook these future liabilities, which may be significant. Now, both standards put all leases – operating and capital – on the balance sheet. Lessees will record a lease liability, measured as the present value of future lease payments, and a lease asset.
Both sets of standards include the new concept of a “right to use” asset: an intangible asset that represents the lessee’s right to use the underlying asset. The initial value of this “right to use” asset is calculated as the lease liability, with adjustments for any prepayments and any costs to put that asset into service.
The scope is similar for both sets of standards. The new standards exclude short-term leases with a duration of 12 months or less, as well as leases for inventory, intangibles, natural resources, biological assets and service concessions. The GASB standards also exclude investment assets carried at fair value, leases that transfer ownership at the end of the lease term, which don’t have a termination clause, and leases subject to other regulations, such as those between municipal airports and air carriers.
How are They Different?
The key difference between the standards is the treatment of operating leases. Under GASB 87, operating leases and capital leases are combined and are treated as financings, while FASB maintains a distinction between the two types of leases.
Under ASC 842, lessees will report capital lease liabilities as long-term debt, while liabilities for operating leases will be reported in a separate category as long-term operating payables. On the income statement, lessees will report a front-loaded lease expense for capital leases and a straight-line expense for operating leases. The lease expense for capital leases will consist of interest expense and amortization of the lease asset. Lessors will report front-loaded interest income for capital leases and straight-line lease income for operating leases.
Under the GASB standard, lease accounting will mirror the FASB treatment of capital leases. All lease liabilities will be reported as long-term debt on the balance sheet, and lessees will report a front-loaded lease expense. Lessors will report interest income.
However, as GASB recently clarified in Statement 88, government financials will have separate note disclosures for lease liabilities and for other long-term debt.
Because the FASB standards have been out since 2016, FASB has released modifications and practical expedients to ASC 842, which I wrote about here and here. In brief, for the year of adoption, companies have the option to apply the new lease standard either retrospectively for all prior years reported or to just the year of adoption.
However, on the GASB side, implementation guidance isn’t out yet. From the standard itself, the limited transition guidance says: “Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation (or, if applied to earlier periods, the beginning of the earliest period restated). However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases become the carrying values of the underlying assets.”
According to the project page for the lease standard, GASB plans a comment period during April and May of 2019, with implementation guidance due out some time after June 2019. Because the new standard will be effective for periods starting after Dec. 15, 2019, entities will need to act quickly on any changes.
The FASB standards are effective for public companies starting in 2019 and for nonpublic companies in 2020. Early implementers of the FASB standards report that they need more time and resources than anticipated, so governments, as well as businesses, would be wise to begin work as soon as possible.