GASB-87 is the new lease accounting standard for governmental entities that becomes effective for reporting periods beginning after June 15, 2021 (June 30, 2022 audits will be first). In summary, governmental entities are required to:
So what does this mean?
A lease is 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.
A lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period), plus periods covered by an option to extend (if it is reasonably certain the option will be exercised) or terminate (if it is reasonably certain the option will not be exercised).
To determine whether a contract conveys control of the right to use the underlying asset, a government should assess whether it has both of the following:
For the Lessor: A lessor owns the asset(s) in question (such as a vehicle, server, or building) and leases it out to the lessee. They must recognize a lease receivable and a deferred inflow of resources. Because the lessor retains ownership of the asset, custody generally reverts to them at the conclusion of the lease term.
For the Lessee: A lessee has the right to use the asset, provided they meet the terms spelled out in the lease contract. They must recognize a lease liability and an intangible right-to-use lease asset.
A short-term lease is a lease with a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract.
GASB-87 impacts both lessees and lessors from:
Nearly every government, higher education, and healthcare organization has at least one lease, whether for buildings, land, vehicles, or equipment. That means GASB-87 will affect most organizations.
The objective of Statement No. 87 is to improve accounting and financial reporting for leases by governments in order to provide better information to financial statement users. Before, leases could be categorized as either a current operating lease or a capital lease. Under the new model, leases are recognized as a means to finance the right to use an asset. Essentially, it narrows the existing definition of a lease and then goes on to adjust how leases are recorded in financial statements. In doing so, GASB-87 establishes a single model for lease accounting based on the concept that leases are financings of the right to use an underlying asset.
GASB-87 is in effect for fiscal years beginning after June 15, 2021. June 30, 2022 is the deadline for complying with the new lease accounting standard.
GASB Statement No. 87 has been in discussion since 2017 with an original implementation deadline of December 2019. Due to COVID-19, GASB-87 was postponed roughly 18 months, giving local governments, higher education, and public healthcare providers additional time to prepare and comply.
Preparing for GASB-87 implementation and ongoing compliance will be a very time-intensive process, and governments should start to evaluate the impact of the new guidance on their financial teams. Depending on the number of leases an organization has and the size of the team, it can take 12 weeks or longer for a small team to plan and prepare for GASB-87.
There are many tasks to consider as you prepare for the mandatory change: Understand the structure and requirements of the new accounting standard. Evaluate whether to overhaul your current lease reporting structure yourself or leverage a technology solution. Complete GASB-87 implementation before the 2022 deadline.
Lease management software, such as DebtBook, has been developed specifically with governments and other public entities (and their unique challenges) in mind. These solutions can help organizations operate more efficiently and significantly reduce the burden placed on local teams to comply with new financial reporting standards. Most importantly, they can address all three phases of challenges faced by organizations looking to implement GASB-87:
If this process sounds overwhelming, you may want to consider a lease management solution. These types of software programs help organizations implement and maintain compliance with GASB-87 by automating time-consuming processes and eliminating manual data entry.
DebtBook delivers a complete, powerful, easy-to-use, cloud-based debt and lease management software for government, higher education, and healthcare finance teams. We make GASB-87 implementation and ongoing compliance easy and produce results that you will be confident in.
This entire process is designed to be straight-forward and painless. We’ve built the intuitive, affordable, and complete solution for government finance teams that’s designed by government finance teams.
Schedule a demo with us today to see how DebtBook enables easy and confident compliance with GASB-87.
The following articles and resources will help you to better understand and navigate the requirements of GASB-87.
Are you ready for GASB-87? If the answer to that question is “no,” not to worry. This guide breaks down GASB-87 implementation into 9 bite-sized pieces for your financial team.Building an Action Plan for GASB-87 Compliance
As the deadline for GASB-87 compliance approaches, it’s time to put a plan in motion to implement the new accounting standards on leases.Considerations for GASB-87 Compliance
There are many factors that local government and other public entities need to consider as they prepare for GASB-87 implementation, but these 5 considerations should be at the top of your list.Understanding Non-Lease Components
Leases can be complex documents that become increasingly complicated when facing changing lease accounting standards and requirements. To make it even more confusing, both lease and non-lease components may be incorporated into the same document.What is an Embedded Lease?
Not all contracts that are considered leases under GASB-87 will include the words ‘lease’ or ‘rent’ to help clearly identify them as leases.These questions can help with identifying whether or not there is an embedded lease in a contract.Guide to the Incremental Borrowing Rate
You will likely be required to determine your organization's incremental borrowing rate (IBR) for at least one of your leases. Use this guide to learn what the IBR is and how to calculate it for your organization.GASB-87 Changes for Lessee vs Lessors
GASB-87 changes the way that leases are reported in financial statements. This shift affects finance teams differently depending on which side of the transaction their organization is on. Learn how these changes may affect you and how to manage them moving forward.