July 5, 2017
New guidance issued by the Governmental Accounting Standards Board (GASB) on June 28 establishes a single approach to the accounting for and reporting of leases by state and local governments.
The GASB indicates that the new guidance, Statement No. 87, Leases, will make governments’ financial statements more useful because it “requires recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract.”
The single approach is based on the principle that leases are financings of the right to use an underlying asset. The new standard provides guidance for nonfinancial assets, including vehicles, heavy equipment, and buildings, but it excludes nonexchange transactions, including donated assets, and leases of intangible assets, such as patents and software licenses.
Under the new guidance, a lessee government must recognize a lease liability and an intangible asset representing the lessee’s right to use the leased asset. A lessor government must recognize a lease receivable and a deferred inflow of resources, and will continue to report the leased asset in its financial statements.
These new requirements enhance the relevance and consistency of information about governments’ leasing activities, according to the GASB.
“The board’s new leasing guidance better aligns the accounting and financial reporting of these arrangements with their economic substance,” GASB Chairman David Vaudt said in a prepared 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.”
A lessee also will report the following in its financial statements:
- Amortization expense 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, including a general description of the leasing arrangement, the amount of lease assets recognized, and a schedule of future lease payments to be made.
A lessor also will report the following 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.
Limited exceptions to the single-approach guidance are provided 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 new standard include accounting for lease terminations and modifications, sale-leaseback transactions, leases with related parties, and reporting nonlease components embedded in lease contracts, such as service agreements.
The new requirements take effect for reporting periods beginning after Dec. 15, 2019, but earlier application is encouraged.