In 2017, the Governmental Accounting Standards Board released GASB 87, the new lease accounting standard for government entities. Government agencies must begin applying the new guidance for all reporting periods starting after June 15, 2021. Initially, the compliance timeline was set for reporting periods starting after December of 2019. However, regulators extended the deadline to accommodate challenges caused by the COVID-19 pandemic.
Despite the delay, early adoption is encouraged. Government agencies need to give themselves time to inventory all of their leases and establish the processes needed to report on them accurately. Those who adopt early will have an easier time transitioning when the compliance deadline arrives. We’ve compiled ten tips and resources to set you up for a smooth transition.
1. The transition requires a multi-departmental team
Because of the expansiveness of GASB 87, the transition requires all departments involved in leasing to work together. You’ll need to work with colleagues in procurement, legal, and any teams with lease agreements to build a complete inventory of your leases and the documents related to them. Our GASB 87 transition guide walks you through the process of building your team.
2. Nearly all leases must be reflected on the Statement of Financial Position
GASB 87 calls for almost all lease arrangements to be reflected on the Statement of Financial Position, which is a significant shift from the legacy guidance. There are limitations around which types of leases fall under the new guidance. Building, equipment, and vehicle leases are in scope, while leases of intangible assets, biological assets, and inventory are not. The GASB also provides exceptions for certain types of agreements and for leases that have a maximum noncancelable term of 12 months or less.
To determine if your contract is considered a lease under GASB 87, use our GASB lease identifier to evaluate each of your leases.
3. The deadline was extended, but you still need to restate prior periods
Despite the extension of the compliance deadline, the GASB has maintained the requirement that government entities must restate prior periods presented, if practicable. To prevent having to scramble at the last minute, government entities should consider preparing to meet compliance standards for GASB 87 for the fiscal year prior to adoption. Get up to speed on the scope of the new guidance and how to apply it to an example lease from a lessee’s perspective.
4. Under GASB 87, all leases are classified as finance leases
One of the biggest changes between the legacy guidance and GASB 87 is that all leases are classified as finance leases. Here’s an example of how to transition from an operating lease to a finance lease under the new standard. This detailed walkthrough covers how to transition from the straight-line method and from the lease contract method, as well as how to record opening and subsequent journal entries.
5. GASB 87 affects lessors and lessees
The GASB, IASB, and FASB all released new lease accounting rules in recent years, and each has different approaches to addressing lessee vs. lessor accounting. GASB 87 in particular was created to align the accounting for both lessor and lessee arrangements. To see how to account for a lease as a lessor, take a look at our step-by-step example. The example includes journal entries under GASB 87 on the effective date of the agreement, the first month, and subsequent months.
6. Software can simplify the transition
With limited resources and remotely distributed teams, a cloud-based software can be an important tool for collecting leases and transitioning to the new standard. Government entities have numerous systems to choose from, and making the right choice can have a significant impact on how easily and effectively you transition. As you evaluate your options, use this RFP template to make sure you’re asking the right questions.
7. It may be hard to make the case for software
If you’re having trouble getting the buy-in from leadership to purchase software, you’re not alone. Budgets are tight and accounting software isn’t always at the top of government agency procurement lists. However, there are many benefits to purchasing a software to automate and streamline the processes for complying with the new guidance, both at the time of transition and for the long term. Use this guide to help you make the case with stakeholders involved in the buying decision.
8. Lease amendments may be considered modifications or terminations
The new guidance sets parameters for what’s considered a lease modification. Unless it reduces the right to use an asset, then any lease amendment is considered a modification. In the event the right of use is reduced, then the lease is accounted for as a partial or full termination. In this webinar, we show you when to make this determination and how to account for the lease based on its treatment.
9. Calculating the implicit interest rate is a critical task
GASB 87 requires lessors and lessees to calculate the present value of their lease payments in order to provide the data essential for proper reporting. To make that calculation, you have to determine the implicit interest rate. We’ve put together a blog that shows you what GASB 87 says about making this determination and how to apply it to an example lease.
Check out our Present Value Calculator tool:
10. Tracking your leases will be difficult
One of the lessons learned from organizations that have already transitioned to the new lease standard is the difficulty they faced in tracking their leases. Compiling a comprehensive inventory, with all of the data required for compliance, will likely be the most time-consuming aspect of the process for you. We offer two resources to help make it easier. First, this video on embedded leases will help you identify leases embedded in service contracts. Leases can be embedded in agreements that don’t appear to be lease contracts on the surface. This video will help you ensure the completeness of your inventory.
As you identify embedded leases, using a consolidated lease tracker will help you centralize all documents and relevant data. As an added benefit, if you choose to use a lease accounting software, the lease tracker spreadsheet will easily feed into the system you choose.
Bonus: Compliance doesn’t have to be a total chore
More than likely you’re spending a lot of time looking at screens these days. So why not mix it up? Test your knowledge of the new rules with this GASB 87 quiz. Share it with your colleagues to see who can claim the title of “Top GASB Expert.”
The deadline extension offers a welcome reprieve for organizations that have had difficulty meeting the initial timeline. However, it’s not a reason to rest on your laurels. GASB 87 is the most sweeping change to lease accounting for government agencies. The better prepared you are, the smoother, more accurate, and compliant your transition will be.