By LeaseCrunch® on September 15, 2021 at 8:00 AM
Lease accounting is getting more complicated. In June 2017, the Governmental Accounting Standards Board issued statement no. 87. The GASB, wanting to increase the usefulness of financial information, is now requiring the recognition of all lease assets and liabilities over 12 months in length to now be recorded as liabilities and right-of-use assets.
In other words, GASB 87 requires all leases that meet the definition of a lease to be accounted for similar to what previously was a capital lease. Although different in timelines, this proclamation runs alongside the new ASC 842 lease accounting standard, set to go into effect at the end of this year. Both are attempts to make financial information more clear and leases represented as closer to their definition: a means to finance the right to use an asset.
What is the Effective Date of GASB 87?
GASB is effective for all fiscal years beginning after June 15, 2021. You may be wondering “has GASB 87 been delayed?”, and it was indeed delayed. Originally GASB 87 was proposed back in 2017 and released in June. It had an initial effective date for fiscal years beginning after December 15, 2019. In May 2020, due to pandemic-related hardships within governmental accounting, the adoption of GASB 87 was pushed back to June 15, 2021.
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. With statement no. 87, all 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 affects the books for previous years, and the recognition requirements for GASB 87.
Is GASB 87 Retroactive?
As stated in GASB 87, firms are required to restate prior periods presented in their financials, when “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 these 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. If you are not sure where to start and are looking for accounting assistance, do not hesitate to contact us at LeaseCrunch to find out more about how to proceed amidst these new guidelines.
What are GASB 87 Requirements?
Under GASB 87, 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 identical 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 under GASB 87 establishes an asset and liability on the statement of financial position, as required by GASB 87.
- 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 for the better, 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 to these new lease accounting guidelines easy. Reach out to us today to receive guidance from LeaseCrunch in this transitive process.