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Leases

This guidance does not represent legal or investment advice. Please consult with your legal counsel regarding the interpretation of language in leases, contracts, and other agreements.

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Preparing for GASB 87 – Leases
Where do I start?
Lease Accounting – LESSEES (GAAP)
Lease Accounting – LESSORS (GAAP)
Cash Basis
Resources

Preparing for GASB 87 – Leases

GASB Statement No. 87, Leases, is effective for fiscal years beginning January 1, 2020.  That may seem like a long way off, but now is the time to develop your implementation plan.

The new standard applies not only to new lease agreements going forward, but also retroactively to existing agreements.  You can start today by identifying the population of current leases to which the standard will apply.

Implementation of the standard can be time consuming because governments may have a significant number of leases administered de-centrally across the organization, making it a challenge to identify and determine which agreements are subject to the new accounting and financial reporting requirements. 

Where do I start?

Start by familiarizing yourself with the new standard. 

Create an inventory of existing leases and other contracts and agreements for review.  Effective communication between departments will be necessary to ensure all leases are identified.

Determine which agreements meet the definition of a lease and which can be excluded.  Just because the word “lease” isn’t in the agreement, doesn’t mean it doesn’t meet the definition of a lease under GASB 87.  And not all “leases” meet the definition of the new standard.  It’s the substance of the agreement that you must analyze – and document.

Document key provisions of each lease agreement such as the lease term, extensions, termination provisions, payment provisions, and an implied interest rate.

Key Definitions – Here are some key definitions and concepts you’ll need for your analysis:

Lease – 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.

Right to use – The right to obtain the present service capacity from use of the underlying asset and the right to determine the nature and manner of it use.

Lease term – The period during which a lessee has a non-cancelable right to use an underlying asset, plus periods covered by a lessee’s or lessor’s option to extend the lease (if reasonably certain the option will be exercised) and periods covered by the lessee’s or lessor’s option to terminate the lease (if reasonably certain the option will not be exercised).  Note that periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party or if both parties have to agree to extend, are excluded from the lease term.

Exceptions/Exclusions:

Not all leases will be subject to the accounting and reporting requirements of GASB 87.  Here are examples of some common scope exclusions:

  • Short-term leases – Leases that have, at the commencement of the lease, a maximum possible term of 12 months or less, including any options to extend.  For example, month-to-month leases.  The lease payments will simply be recognized as revenue by the lessor and expenses/expenditures by the lessee.
  • Contracts that transfer ownership (formerly known as a capital lease) – A contract that transfers ownership of the underlying asset to the lessee by the end of the contract and does not contain termination options should be reported as a financed purchase by the lessee or a sale by the lessor.
  • Intangible assets – Such as mineral rights, patents, software, copyrights.  Except for the sublease of an intangible right-to-use asset created by the original lease of a tangible underlying asset.
  • Biological assets – Such as timber, living plants, living animals.
  • Leases of inventory.
  • Service concession arrangements – These are covered by GASB 60.
  • Assets financed with outstanding conduit debt – Unless both the asset and conduit debt are reported by the lessor.
  • Supply contracts – Such as power purchase agreements.
  • Certain regulated leases – Such as aviation leases between airports and air carriers.

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LEASE ACCOUNTING

LESSEES (GAAP)

Government-wide statements and proprietary funds:

  • At the start of the lease term, a lessee should recognize a lease liability and an intangible right-to-use lease asset.
    • (DR) Lease Asset – Measured as the sum of the initial measurement of the lease liability – plus any initial direct costs and lease payments made prior to the start of the lease, less any lease incentives.
    • (CR) Lease Liability – Initially measured at the present value of payments expected to be made during the lease term.
    • (CR) Cash (possible entry) – for payment of any initial direct costs and lease payments made prior to the start of the lease.
  • Lease payments made to the lessor result in:
    • (DR) Reduction of the lease liability
    • (DR) Recognition of interest expense – a non-operating expense
    • (CR) Cash
  • The lease asset is amortized over the shorter of the lease term or the useful life of the underlying asset:
    • (DR) Amortization expense
    • (CR) Lease asset accumulated depreciation
Governmental funds:
  • At the start of the lease term, a lessee should recognize an expenditure and other financing source:
    • (DR) Capital outlay expenditure – for the amount of the lease asset, plus any initial direct costs and lease payments made prior to the start of the lease, less any lease incentives.
    • (CR) Other financing source – amount equal to the lease liability
    • (CR) Cash (possible entry) – for payment of any initial direct costs and lease payments made prior to the start of the lease.
  • Lease payments made to the lessor result in:
    • (DR) Debt service – principal
    • (DR) Debt service – interest
    • (CR) Cash

LESSORS (GAAP)

Government-wide statements, governmental and proprietary funds:

  • At the start of the lease term, a lessor should recognize a lease receivable and a deferred inflow of resources. 
    • (DR) Lease Receivable – Initially measured at the present value of lease payments expected to be received during the lease term.
    • (DR) Cash (possible entry) – for any lease payments received prior to the start of the lease.
    • (CR) Deferred Inflow – Measured as the sum of the initial measurement of the lease receivable – plus any lease payments received prior to the start of the lease, less any lease incentives.
  • Lease payments received from the lessee result in:
    • (DR) Cash
    • (CR) Reduction of the lease receivable
    • (CR) Recognition of interest income – a non-operating revenue. Use BARS 361.4X
    • (DR) Reduction of the Deferred Inflow – in a systematic and rational manner
    • (CR) Recognition of lease revenue –
      All Governmental and Proprietary Funds: Use BARS 34X.XX (X = applicable function). 
      Proprietary funds only – use BARS 362 for non-operating leases.
      Governmental funds only – use BARS 362 for leases not tied as specific operation/function or leases that are infrequent in nature.
  • The lessor continues to report and, if applicable, depreciate the leased capital asset.

The following example is for a 60 month lease, with payments of $1,000 per month, at a discount rate of 3% (present value of total lease payments = $55,791):

Calculations above are based on summary amortization table (actual lease payments are made monthly):

CASH-BASIS

  • Lessees – Schedule 9 – add a lease liability for the total amount (not the present value) of the future lease payments.  Subsequent lease/rental payments (BARS 591.XX) reduce the lease liability.
  • Lessors – Use BARS 34X.XX (X = applicable function) for lease payments received.

Resources: 

GASB Statement No. 87, Leases

GASB Leases project webpage

GFOA Best Practices/Advisory – Accounting for Leases 

Audit Connections 

1/15/19 Article: Lease accounting changes are coming soon

Accounting Literature

8/1/2019 Journal of Accountancy Article: Lessee accounting for governments, an in-depth look 

SAO has established a local GASB 87 implementation workgroup to identify and provide resources for local governments and to identify and resolve implementation issues. If you have any questions or topics for discussion, please contact Stacie.Tellers@sao.wa.gov or Debra.Burleson@sao.wa.gov or the SAO Help Desk.

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