By LeaseCrunch® on January 23, 2023 at 7:00 AM
Lease accounting gets increasingly complicated with each new accounting standard introduced by the Governmental Accounting Standards Board, also known as GASB.
The GASB, wanting to increase the usefulness of financial information, released statement no. 87 in June 2017, which now requires the recognition of all leases over 12 months in length to now be recorded as liabilities and right-of-use assets.
In other words, GASB 87 leases have to be accounted for in a manner similar to what previously was a capital lease; however, GASB 87 leases are not classified as either operating or capital leases. Instead, GASB 87 leases are recognized merely by the fact that they are financings of the right to use an asset.
Although they are different in timelines, this proclamation runs alongside the new ASC 842 lease accounting standard, which went into effect for public company fiscal years starting after December 15, 2018, and for all other FASB GAAP organizations with fiscal years starting after December 15, 2021. Both are attempts to make financial information more clear and leases represented as closer to their definition: as a means to finance the right to use an asset.
When Must GASB 87 Be Implemented? What is the Effective Date of GASB 87?
The GASB 87 implementation date was June 15, 2021.
Originally the GASB 87 effective date was December 15, 2019. In May 2020, due to pandemic-related hardships within governmental accounting, the GASB 87 effective date was delayed to June 15, 2021.
Since that day, all leases have been documented as GASB 87 leases under the single model of lease accounting layed out in the GASB 87 declaration.
How Do You Implement GASB 87?
One of the main reasons the Board initiated the project was to provide consistent accounting for all leases. By doing so, leases are more accurately categorized on accounting sheets as financings of the right to use an asset for a predetermined period of time. GASB 87 leases are now generally called financings, instead of upholding the previous distinction between capital and operating leases.
In order to properly adhere to the requirements of this new statement, entities need to know two things: whether GASB 87 affects books of previous years, and the recognition requirements for GASB 87 leases.
Is GASB 87 Retroactive?
As stated in GASB 87, firms are required to restate prior periods presented in their financials whenever it’s considered “practical”. Current guidance indicates that there is a high threshold for deeming previous year’s statements “impractical,” so entities should be prepared to restate previous years’ financial statements in order to comply with GASB 87.
Furthermore, any of an entity’s previous statements must be accounted for in the same way. If an entity presents two years of financial information, then both years must be accounted for using the same standard, even if the standard for one year is not as effective the following year.
What are GASB 87 Requirements?
With GASB 87 leases, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset at the end of the lease term. The lease liability is the present value of future payments expected to be made over the course of the lease, and the right-of-use assets are measured as the initial amount of lease liability, plus any payments made to the lessor at or before the time of commencement of the lease and minus any lease incentives received from the lessor.
A lessor is required to recognize a lease receivable and a deferred inflow of resources. The lease receivable is measured identically to how a lessee’s lease liabilities are measured, and deferred inflow of resources are measured exactly how a lessee’s right-of-use assets are measured.
GASB 87 Step-by-Step:
- Calculate the initial lease liability - As stated above, this is the present value of future lease payments that are to be made over the term of the lease.
- Calculate the initial asset value - The asset value is the amount of initial measurement of lease liability, plus anything more the lessee pays over the course of the term of the lease and minus lease incentives received from the lessor.
- Record the opening journal entry under GASB 87 - Booking an initial journal entry for GASB 87 leases establishes an asset and liability on the statement of financial position.
- Book subsequent journal entries - The right-of-use asset is written off, or amortized, and reported as an outflow of resources over the lease term. This is meant to 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 expense of the leased asset. The latter is calculated utilizing an interest rate multiplied by the ending liability balance of the previous period to determine expense.
So, what’s next?
As you can see, lease accounting is getting more complicated. While the change is ultimately for the better, seeing as financial statements will more closely match the definitions of their assets, this change also means that it will be more difficult for entities to properly account for leases in their finances.
Luckily, there are experts who can help, and software to make compliance with these new lease accounting guidelines easy. Reach out to us today to receive guidance from LeaseCrunch in this transitive process.