10 Things Government Finance Teams Need to Do Now to Prepare for GASB 87
It’s been a busy few years for government finance teams with new standards for pensions, post-employment benefits and now leases. While the new GASB lease standards, codified as Statement No. 87, Leases, won’t be effective until 2020, the changes are significant, so government finance teams should start getting ready now.
For the first time, future payments on operating leases will appear on the balance sheet as a lease liability. Here’s an overview of the new lease standards, and 10 steps your organization needs to take now to be ready.
#1: Gather leases and contracts. Depending on the number of leases your organization has, this may be a challenge. Some contracts also include embedded leases that were previously treated as expenses, so you may be surprised to find more operating leases than you realized. Checking accounts payable for recurring payments may help you locate agreements that you’ll need to analyze.
#2: Analyze all contracts to determine which are leases under the new standard. GASB 87 defines a lease as a “contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset), as specified in the contract, for a period of time in an exchange or exchange-like transaction.” Here are some of the agreements that can be excluded:
- Short-term leases that are one year or less in duration.
- Intangibles, such as investment assets, software licenses and patents.
- Financed purchases, where ownership of the asset transfers at the end of the lease without an additional payment.
Find out about more of the exclusions here.
#3: Review leases for multiple components. Some leases include service agreements that will need to be split off from the entire lease.
#4: Determine appropriate materiality thresholds for capitalization. Work with your auditor to determine what this should be. Be aware that items that are well below that threshold individually may be material in the aggregate.
#5: Select a technology solution to help manage your leases. Unless your organization only has a few leases, the calculations for journal entries and footnote disclosures will most likely be beyond the capabilities of Excel. When choosing a software solution, keep in mind that tracking this information from leases will be an ongoing project, so look for one that’s easy to use and provides your organization with all the information you’ll need. Make sure to consider document storage as part of the capabilities.
#6: Examine bond covenants, loan covenants and debt limitations to determine impact. While a recent update from GASB (GASB 88) specifies that lease liabilities are excluded from the definition of debt for the purposes of financial statement disclosures, it’s not clear whether banks, credit rating agencies or other stakeholders will take a similar stance.
Adding liabilities for operating leases to the balance sheet may mean that covenants for bond contracts and loan agreements will be violated. If this is the case, you may need to renegotiate those agreements. Contacting these stakeholders and other interested parties early on is crucial.
Adding to the complexity, the rules and statutes governing debt limitations vary across states, counties and municipalities. You may need to consult with an attorney to determine whether lease liabilities count as debt for those limitations.
#7: Develop new policies and procedures. Unlike many other financial controls, you’ll need to work as a team with people outside of accounting, including procurement, IT and legal, to make sure all leases and contracts go through accounting. You may need to educate others about the balance sheet impacts of leases.
#8: Do a trial calculation and run it past your auditors. Because the calculations are different from the previous treatment of leases, some advisors are recommending performing a trial calculation on a subset of your leases. Then, ask your auditors to check your numbers before you do the entire population of leases.
#9: Start early. Over on the non-governmental side, early adopters of FASB’s lease standard, ASC 842, which is similar in many respects to GASB 87, report that they need two or three hours per lease to analyze and extract the data. Adding to the challenge, many government finance professionals wear many hats, and dealing with financial matters may be only a small part of their responsibilities.
#10: Start learning and keep learning. Understanding the new standards is a steep learning curve. You’ll need to dedicate time and resources for your team to get up to speed.