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LeaseCrunch Blog

Read about ASC 842 & other lease accounting topics

Accounting for GASB 87 and GASB 96

GASB 87 and GASB 96 are similar, yet very different. Both share the characteristic of further complicating lease accounting in the name of financial clarity. However, whereas GASB 87 is an accounting standard for leases, GASB 96 is an accounting standard for SBITAs, or subscription-based information technology arrangements. 


In regards to these two specific GASB standards, what would the accounting process look like? Is there anything in particular you should worry about in regards to differences between GASB 96 and GASB 87 lease spreadsheets? Find out in our all-you-need-to-know blog about these two GASB standards.


What is GASB 87?


GASB 87 requires all leases over 12 months in length to be recorded as liabilities and lease assets. Furthermore, all GASB 87 leases are recognized merely by the fact that they are financings of the right to use an asset. GASB 87 runs in tandem with ASC 842, as both attempt to make financial information clearer by defining leases as means to finance the right to use an asset.


Accounting for GASB 87 Lease Spreadsheets

The steps to account for a lease under GASB 87 are as follows:


  1. Calculate the initial lease liability - The present value of future lease payments that are to be made over the term of the lease.
  2. Calculate the initial asset value - The asset value is the sum of the lease liability, payments made to the lessor at or before commencement, initial direct costs less any lease incentives received from the lessor.
  3. Record the initial journal entry under GASB 87 - This establishes an asset and liability on the statement of financial position.
  4. Book subsequent journal entries - In the final step, the ROU asset is written off, or amortized, and reported as an outflow of resources over the lease term. This has a function similar to a depreciation expense; representative of the reduction of an asset’s value over time. Subsequent journal entries will also decrease the lease liability over time and record the interest payable and expense of the leased asset. The latter is calculated by utilizing an interest rate multiplied by the ending liability balance of the previous period to determine expense.

What is GASB 96?


GASB 96 is meant to provide guidance for accounting and financial reporting for SBITAs, or subscription-based information technology arrangements. GASB 96 specifically outlines the following for SBITAs:

  • A SBITA arrangement creates an intangible subscription asset and a corresponding subscription liability
  • The capitalization criteria for outliers other than subscription payments 
  • Requires governments and their entities to note disclosures regarding SBITAs
  • Defines the term of the subscription as the period of time during which a government entity has the right to use the underlying assets


Accounting for GASB 96

SBITAs should be accounted for under GASB 96 in a similar manner to the way that leases are accounted for under GASB 87. When a government entity enters into a SBITA, they recognize the subscription asset and a related subscription liability on financial statements. The value of these is determined by calculating the present value of subscription payments that are due over the term of the SBITA and discounted by a discount rate. The government entity should then amortize these assets in a systematic and rational manner over the subscription term, thereby further reducing the subscription liability caused by payments made during the term.


GASB 87 financial reporting is notoriously easier than that of GASB 96 because the terms surrounding SBITAs can often be difficult to determine. If you need help adding a SBITA in your LeaseCrunch accounting software, check this Knowledge Base page out. 


How do GASB 87 and GASB 96 Impact Financial Reporting?

Before GASB 87 and GASB 96 went into effect, leases were not recorded on Statements of Financial Position, only as outflows of resources. After GASB 87 went into effect, it required government entities to report both the lease liability and assets on the Statement of Financial Position.


GASB 96 instead requires government entities to report subscription liabilities and assets. 


What are Some Common Mistakes Made When Trying to Comply with GASB 87 and GASB 96?

For GASB 87, some of the most common mistakes we see are with modifications and terminations, such as when to re-measure the lease or adjust the lease term. We also see struggles with determining what constitutes a lease payment, as well as identifying the incremental borrowing rate or the implicit discount rate. 


For GASB 96, we also see mistakes with identifying the incremental borrowing rate or implicit discount rate, as well as what constitutes a fixed payment, which is one input in determining the lease liability. Determining the subscription term of the agreement is another common question received by our support team that could be a source of mistakes for some organizations.


Have you struggled with these areas yourself? Have outlying questions regarding any of them? Don't hesitate to contact us here at LeaseCrunch for more information.


Why does Excel Lead to Non-Compliance?

Excel can lead to multiple errors that a lease accounting software would otherwise catch. Some of the mistakes that organizations have suffered through because of Excel include:

  • Overpayment because of a lack of notifications about rent abatement
  • The loss of tenant improvement allowance (TIA) 
  • Early escalation, which leads to underpayment
  • Incorrect calculations of interest on lease liability
  • Issues with calculations for remeasurements or terminations

As you can see, using Excel for GASB 96 and GASB 87 calculations is not the best way to avoid errors while improving the ease of lease accounting. Lease software can help mitigate these risks while providing a host of other benefits as well.


What are the Advantages of Using Specialized Software for GASB Lease Accounting?

There are several reasons why specialized software can help you avoid GASB 96 and GASB 87 spreadsheet errors and overall improve your lease accounting processes. These include increases in:

  • Accuracy
  • Security
  • Integration efficiency
  • Ease of Use
  • Cost efficiency
  • Ability to handle lease modifications

Interested in learning more about how lease accounting software can help you avoid the risk associated with accounting under GASB 96 and GASB 87? Download our free resource today!

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