Municipalities use short-term leases
A local or state government will consider any lease that has a maximum lease term of 12 months as a short-term lease. This 12-month period is inclusive of any extension option (regardless of the likelihood of it being exercised). Month-to-month leases are considered short-term. GASB 87 does not apply to short-term leases. To account for short-term leases, the lessee will simply recognize the outflows of cash as an expense, and lessors will recognize the inflows of cash as revenue
Maximum lease terms for cancelable leases depend on whether both or just one party can cancel the lease. If both the lessee or lessor can cancel without the other party’s permission, the maximum lease term excludes the cancelable period.
For example, a municipality and equipment company enter into a 24-month lease, and either party can cancel after the first eight months without cause. Thus, the maximum lease term is eight months, and this would be considered a short-term lease.
Yet, if only one party has a cancellation option, that part is included in the maximum possible term. Referring to the above example, say, the same municipality in the 24-month lease is the only party that has the option to cancel after the first eight months; then the maximum lease term is considered 24 months, and this wouldn't be considered a short-term lease.
Example:
A municipality decides to lease a piece of expensive equipment instead of purchasing it. It agrees to pay the lessor a monthly rent payment of $1,000 over six months. The six-month lease term makes the lease a short-term lease since it’s less than 12 months.
What’s important here?
Short-term leases have a maximum term of 12 months, including extension options, regardless of whether they’ll be exercised. Short-term leases don’t require any additional disclosures under GASB 87. Lessees recognize short-term lease payments as expenses, and lessors recognize the incoming payments as revenues.
