Lease accounting gets increasingly complicated with each new accounting standard introduced by the Governmental Accounting Standards Board, also known as GASB. The GASB, wanting to increase the usefulness of financial information, released statement no. 87 in June 2017, which now requires the recognition of all leases over 12 months in length to now be recorded as liabilities and right-of-use assets. 

In other words, GASB 87 leases have to be accounted for in a manner similar to what previously was a capital lease; however, GASB 87 leases are not classified as either operating or capital leases. Instead, GASB 87 leases are recognized merely by the fact that they fit the definition of a lease.

What is the Relationship Between GASB 87 and the ASC 842 Lease Accounting Standard?

Although they are different in timelines, this proclamation runs alongside the new ASC 842 lease accounting standard, which went into effect for public company fiscal years starting after December 15, 2018, and for all other FASB GAAP organizations with fiscal years starting after December 15, 2021. Both are attempts to make financial information more clear and to represent leases more similarly to their definition: as a means to finance the right to use an asset.

When Must GASB 87 Be Implemented? What is the Effective Date of GASB 87?

The GASB 87 implementation date was June 15, 2021. 

Originally the GASB 87 effective date was December 15, 2019. In May 2020, due to pandemic-related hardships within governmental accounting, the GASB 87 effective date was delayed to June 15, 2021.

Since that day, all leases fitting the definition have been documented under the single model of lease accounting layed out in GASB 87.

How Do You Implement GASB 87?

One of the main reasons the Board initiated the project was to provide consistent accounting practices for all leases. By doing so, leases are more accurately recorded on financial statements as Lease Assets and Lease Liabilities. It is important to note that there is no longer a distinction between lease classifications of capital and operating leases, as all are now considered finance leases. 

Entities subject to GASB 87 have an effective date for fiscal years beginning after June 15, 2021, with a requirement to restate prior periods unless it is not practical to do so. Entities will also identify all leases to determine if they fit the definition of a lease, further recording a lease asset and lease liability for those that do meet the definition. Finally, entities will amortize the lease asset in a systematic and rational manner over the lease term.

Is GASB 87 Retroactive, and What are the Implications for Restating Prior Financial Periods?

As stated in GASB 87, firms are required to restate prior periods presented in their financials whenever it’s considered “practical” to do so. Current guidance indicates that there is a high threshold for deeming previous year’s statements “impractical,” so entities should be prepared to restate previous years’ financial statements in order to comply with GASB 87 lease accounting standards. 

Furthermore, any of an entity’s previous year’s statements must be accounted for in the same way. If an entity presents two years of financial information, then both years must be accounted for under GASB 87.

If you are not sure where to start and are looking for accounting assistance, do not hesitate to contact us at LeaseCrunch to find out more about how to proceed amidst these new guidelines.

What are GASB 87 Requirements?

With GASB 87 lease accounting, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset at the beginning of the lease term. The lease liability is the present value of future payments expected to be made over the course of the lease, and the right-of-use assets are measured as the initial amount of lease liability, plus any payments made to the lessor at or before the time of commencement of the lease and minus any lease incentives received from the lessor.

GASB 87 lessor accounting requires a lessor to recognize a lease receivable and deferred inflow of resources. The lease receivable is measured by determining the present value of future lease payments expected to be received, and deferred inflow of resources are measured as the lease receivable plus payments made by the lessee at or before commencement less incentives paid by the lessor.

GASB 87 Step-by-Step:

1. Calculate the initial lease liability - As stated above, this is the present value of future lease payments that are to be made over the term of the lease.
2. Calculate the initial asset value - The asset value is the amount of initial measurement of lease liability, plus amounts paid to the lessor at or before commencement less lease incentives received from the lessor.
3. Record the opening journal entry under GASB 87 - Booking an initial journal entry for GASB 87 leases establishes an asset and liability on the statement of financial position.
4. Book subsequent journal entries - The right-of-use asset is amortized and reported as an outflow of resources over the lease term. This is meant to function similar to a depreciation expense, representative of the reduction of an asset’s value over time. Subsequent journal entries will also decrease the lease liability over time when payments are made and record the interest expense on the remaining lease liability.

How Can LeaseCrunch's Software Help Governmental Entities Navigate and Streamline their Compliance with GASB 87 Requirements?

With the advent of GASB 87, financial statements will more closely match the definitions of their assets, improving overall clarity, but also making lease accounting more complicated for government entities.

Luckily, there are experts who can help, and software to make compliance with these new lease accounting guidelines easy. Reach out to us today to receive guidance from LeaseCrunch in this transitive process.

FAQ’s

Are there any exemptions or exceptions to GASB 87 that governmental entities should be aware of?

The exemptions to GASB 87 are:

• Leases of intangible assets
• Leases to explore for or use natural resources
• Leases of biological assets
• Leases of inventory
• Service concession arrangements
• Supply contracts
• Underlying assets financed with outstanding conduit debt
• Contracts that transfer ownership

How does GASB 87 redefine lease accounting compared to previous standards?

GASB 87 leases have to be accounted for in a manner similar to what was previously a capital lease. GASB 87 leases are recognized merely by the fact that they are financings of the right to use an asset.