GASB’s New Approach to Lease Standards Coming Soon
The Governmental Accounting Standards Board (GASB) has kept finance teams in government busy with a flurry of complex new standards. First came pensions, followed by post-employment benefits and now leases. In June 2017, GASB released Statement No. 87, Leases. This new standard was developed in consultation with the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board, and will be effective for periods beginning after Dec. 15, 2019. That date may seem a long way off, but the changes are dramatic enough that it would be wise to begin planning early.
Under the new standard, all leases, including operating leases, will be recorded on the balance sheet. Like the recent FASB Accounting Standards Update – Leases (Topic 842), the GASB standard for leases requires recognition of an intangible “right-to-use” asset on the lessee’s balance sheet for all leases that fall under the scope of the standard.
As GASB defines it, a lease is “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.”
The first step in implementing the standard will be to determine which contracts and other agreements fit this definition. Eliminating the leases that are not subject to this standard can simplify the search, so let’s look at the exclusions first.
What’s Not Included:
- This new standard does not apply to short-term leases with a term of 12 months or less. Leases with rolling month-to-month or year-to-year terms count as short-term leases, and will be excluded.
- It also does not apply to financed purchases where ownership is transferred at the end of the lease term without further payments by the lessee. Those are to be treated as a straightforward purchase and loan. However, leases with a bargain purchase option at the end of the lease will fall into this category until the option is exercised.
- The standard also excludes leases of investment assets, intangibles such as software licenses and patents, leases of animals or plants, and aviation leases.
- Agreements that grant the right to use property for a nominal fee such as $1 don’t fit this definition and will be accounted for as donations or grants.
- Any service component in a lease agreement will have to be split off from the entire lease, unless it is impracticable to separate the service component from the financing component. In this case, the entire agreement will be treated as a single lease.
What Are the Changes?
Treatment of leases by lessors and lessees will mirror each other under the new standard. In contrast to the FASB standard, which retains a distinction between capital leases and operating leases, under GASB 87, all leases will receive the same treatment.
Treatment by Lessees:
- At the onset of a new lease, lessees will record a lease liability, measured as the present value of future payments under the lease. Lessees will also record an intangible asset that represents the lessee’s right to use the asset.
- The right-to-use asset will initially be given the same value as the lease liability, adjusted for any payments made prior to the commencement of the lease, costs to put the asset in service and any lease incentive payments made.
- On the income statement, rent expense will be replaced by two items: amortization expense and interest expense. Amortization expense is calculated over the shorter of the lease term or the useful life of the asset. Since land is not a depreciable asset, the right-to-use asset for leases of land will not be amortized.
- Required note disclosures will provide a general description of the arrangement, the amount of lease assets recognized and a schedule of future lease payments.
Treatment by Lessors:
- Lessors will record a lease receivable and a deferred inflow of resources on the balance sheet. The leased asset will remain on the balance sheet of the lessor. The lease receivable is the present value of the future payments to be received.
- Over on the income statement, lessors will recognize lease revenue over the term of the lease and interest income on the lease receivable.
- Note disclosures for lessors will include a general description of the arrangement and the total amount of resources inflows recognized.
Where to Get More Information