GASB 87: Keys to a Successful Transition to the New Lease Standard

Overview of GASB 87

GASB 87 narrows the definition of a lease and provides a new framework under the principle that leases are financings. The new guidance replaces lease accounting rules covered by GASB 13 and GASB 62.

The goal of the new lease accounting standard is to:

• More accurately portray lease obligations
• Increase the usefulness of governmental financial statements

Definition of a Lease

A lease is defined as 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.

What changed?

The new standard states that, “a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources.”

By adopting GASB 87, public sector entities will bring additional liabilities onto their financial statements, potentially impacting their credit ratings. And because leases are classified differently under GASB 87, the standard will directly impact how entities recognize, measure, and manage their leases.

Scope Exclusions

Under GASB 87, all leases are accounted for as financing leases — unless they fall under one of the qualifying exceptions:

• Leases of intangible assets, including rights to explore for or to exploit natural resources such as oil, gas, and minerals and similar nonregenerative resources; licensing contracts for items such as motion picture films, video recordings, plays, manuscripts, patents, and copyrights; and licensing contracts for computer software. In sublease transactions, however, this Statement does apply to the intangible right-to-use assets that are created by the original leases of tangible underlying assets.
• Leases of biological assets, including timber, living plants, and living animals.
• Leases of inventory.
• Contracts that meet the definition of a service concession arrangement in paragraph 4 of Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements.
• Leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
• Supply contracts, such as power purchase agreements

Additionally, all short-term leases with a maximum noncancelable term of 12 months or less, regardless of whether all noncancelable terms (e.g., renewals) are expected to be exercised, can be excluded from recognition on the statement of financial position.

Keys to a successful transition

1.  Understanding the requirements. It is important that you understand all the key provisions under the new standard by reading the statement and the implementation guide, and attending CPE courses in order to get familiar with the requirements.
2. Gathering your implementation team. More than likely, the accounting team is leading the transition. However, it’s imperative that you include colleagues from other departments, IT, legal, and procurement to build a complete lease inventory. In addition, hiring a subject matter expert to manage the implementation process.
3. Reviewing and modifying policies and procedures. Evaluate how you’re currently managing your lease portfolio and introduce a methodical process to gain control and efficiencies to ensure your organization capture all material lease and maintain compliance on a go-forward basis. Implement protocols that are sustainable for the long-term.
4. Validating data before transition. To ensure you pass accounting audits with completeness and accuracy, review your data for any duplicates, missing figures and inconsistencies.
5. Managing your lease portfolio. Like many accounting functions, you are able to use Excel to track and manage leases. However, leases can be complicated and, regardless of your lease portfolio size, we recommend that you invest in a lease accounting software to leverage the complexity and the variety of each lease contract and reduce any potential error.

Conclusion

The adoption of GASB 87 will be complex and likely will require significant time and effort to correctly implement. It is critical that the time is now. By following the tips as stated in this article, you should feel confident in your ability to comply with the new lease accounting standard.