GASB Update – Elizabeth Thyer, Partner, CPA
The Governmental Accounting Standards Board has issued Statement No. 87 – Leases. This Standard was originally to be effective for reporting periods beginning after December 15, 2019, but was deferred to periods beginning after June 15, 2021 due to the COVID-19 pandemic. GASB Statement No. 87 requires the recognition of certain lease assets and liabilities for leases which were previously classified as operating leases and eliminates the distinction between capital and operating leases for financial reporting purposes. Governmental entities can be both lessors and lessees.
A lease, as defined by GASB Statement No. 87 is, “a contract that conveys control of the right to use another entity’s non-financial asset as specified in the contract for a period of time in an exchange or exchange-like transaction.” Examples of non-financial assets include buildings, equipment, and vehicles. GASB Statement No. 87 does not apply to leases of intangible assets, inventory, or supply contracts.
When the governmental entity is the lessee: at the beginning of the lease, an entry will be made to record a capital outlay expenditure and to record an other financing source on the fund financial statements. The lessee will also recognize a lease liability and an intangible right to use the asset (capital asset) on the government-wide financial statements. As lease payments are made, the entity will record expenditures in a debt service line item. These expenditures should be included in the debt service function for budgeting purposes. When the governmental entity is the lessor: at the beginning of the lease, an entry will be made to record a lease receivable and a deferred inflow of resources. As lease payments are received, the entity will record those payments and reduce the lease receivable. Deferred inflow of resources will be adjusted systemically over the term of the lease.
With the implementation of this standard, the governmental entity may want to create new line items for the lease related receivables, deferred inflows of resources, expenditures and other financing sources for easier tracking. It may also be helpful to segregate leased assets from other capital assets within the depreciation software. Implementation of GASB Statement No. 87 will also require footnote disclosure. Whether the governmental entity is the lessor or the lessee, these disclosures will include a general description of leasing arrangements including the basis, terms and conditions of the lease. Other disclosures will vary depending on whether the entity is the lessor or the lessee.