June 28, 2017
The Governmental Accounting Standards Board released guidance Wednesday to create a single approach to accounting for and reporting state and local government leases.
This approach is based on the principle that leases are financings of the right to use an underlying asset. GASB released the standard after its sister organization, the Financial Accounting Standards Board, released a long-awaited leasing standard of its own for businesses last year that is due to take effect in two years.
GASB Statement No. 87, Leases, offers guidance for lease contracts for nonfinancial assets—such as vehicles, buildings and heavy equipment—but not for nonexchange transactions, such as donated assets and leases of intangible assets like software licenses and patents.
Under GASB’s new standard, a lessee government has to recognize (1) a lease liability and (2) an intangible asset representing the lessee’s right to use the leased asset.
A lessor government also needs to recognize (1) a lease receivable along with (2) a deferred inflow of resources. Lessors will still report leased assets on their financial statements.
A lessee also is required to report the following information on its financial statements:
- Amortization expenses for using the lease asset (similar to depreciation) over the shorter of the term of the lease or the useful life of the underlying asset;
- Interest expense on the lease liability;
- Note disclosures about the lease, with a general description included of the leasing arrangement, along with the amount of lease assets recognized, and a schedule of future lease payments to be made.
A lessor also has to report the following information in its financial statements:
- Lease revenue, systematically recognized over the term of the lease, corresponding with the reduction of the deferred inflow;
- Interest revenue on the receivable;
- Note disclosures about the lease, including a general description of the leasing arrangement and the total amount of inflows of resources recognized from leases.
“The board’s new leasing guidance better aligns the accounting and financial reporting of these arrangements with their economic substance,” said GASB Chairman David A. Vaudt in a statement. “The new single model for reporting governmental leasing agreements is designed to result in greater transparency and usefulness for financial statement users. It also is meant to reduce complexity in application for preparers and auditors of governmental financial statements.”
Limited exceptions to the single-approach guidance are offered for:
- Short-term leases, defined as lasting a maximum of 12 months at inception, including any options to extend;
- Financed purchases;
- Leases of assets that are investments;
- Certain regulated leases, such as between municipal airports and air carriers.
Other issues addressed in the standard include:
- Accounting for lease terminations and modifications;
- Sale-leaseback transactions;
- Nonlease components embedded in lease contracts (such as service agreements);
- Leases with related parties.
GASB noted that one of the principles guiding its standard-setting work is that the costs incurred through the application of its standards, compared with possible alternatives, need to be justified when compared to the expected overall public benefit. It admitted the costs of implementing the changes required by the new standard may be significant, but believes the anticipated benefits that will result from the information provided initially and on an ongoing basis will be significant.
The exceptions listed above, along with exclusions of supply contracts and leases of inventory, should reduce the cost of implementation, according to GASB. The standard also includes cost-reducing provisions pertaining to reassessment of the lease term. That should permit state and local governments to report multiple-component contracts as a single lease unit when a best estimate of individual components is not practical, and won’t require lessors to derecognize the underlying assets.
The full text of Statement 87, along with a high-level GASB Outlook summary, are available on GASB’s website.