In this webinar, Dan Krol, CPA and Audit Partner, and Andrew Swords, Senior Accountant, discuss GASB Statement No. 87 Leases, including:
- Overview of GASB No. 87
- Preparing for Implementation of the New Standard
- What is a Lease?
- Lease Accounting – Financial Statement Impacts
- Example Journal Entries
- GASB 96 Subscription-Based Information Technology Arrangements
Overview of GASB No. 87
GASB No. 87 is effective for reporting periods beginning after June 15, 2021. Governmental Entities, School Districts, and BOCES are required to implement for the year ending June 30, 2022.
All agreements that meet the definition of a lease should be recognized in the financial statements and classified as a finance lease under a single model. The lessee is required to recognize a lease liability and an intangible right-to-use lease asset. The lessor is required to recognize a lease receivable and a deferred inflow of resources.
A retrospective application will restate financial statements for all periods presented. Under practical expedient, the government would adjust the beginning net position for the cumulative effect of applying the new standard.
How to Prepare for New Standard Implementation
Following are steps to implement the New Standard:
1. Develop a Lease Inventory including:
- Description of the item
- Terms of the contract
- Interest rate
- Who controls the asset and has the right to determine the nature and manner of use?
- Who has title to the asset, and does ownership transfer at the end of the lease?
2. Work with Your Auditor
- Review Lease Inventory
- Lease Materiality
3. Work with BOCES
- Confirm lease inventory
- Identify once time payments for items, deferred payment plans, or multi-year purchase agreements (discussed later)
4. Determine how you will calculate the Lease Liability and prepare information for disclosure.
- Review software options that are available to assist in calculating the Lease Liabilities
- Compile necessary information for disclosures (schedule of future lease payments, interest rates, methodology used, etc.)
- Software options include Excel, LeaseCrunch, LeaseQuery, and many others.
- Reach out to your Auditors to see if they have software available
What is a Lease?
A lease is a contract that conveys control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange transaction.
A nonfinancial asset is a value derived from its physical characteristics (land, buildings, motor vehicles, and equipment).
Examples of typical leases are classroom space, phone systems, copiers, desktops, laptops, and BOCES transactions, which consist of deferred payment plans, installment purchase contracts, and cash payments for switches, desktop computers, or other devices.
Accounting for deferred payment plans and multi-year purchase Agreements is consistent with that of a typical lease transaction (right-to-use lease asset and lease liability).
Accounting Treatment of Leases
- A lease agreement specifies a noncancelable term after considering possible extensions for 12 months or less
- Lease accounting requires entries to post the outflow of resources during each period. Rent expense in government-wide and expenditure in the modified accrual financial statements
Contracts with transfers of ownership
- Lease agreement transfers ownership of the asset to the lessee by the end of the contract and cannot contain termination options. GASB allows contracts to contain cancellation clauses to be treated as a sale as long as reasonably certain clauses will not be exercised
All other leases (non-ownership-transferring)
- All other leases that do not fit into the first two categories are treated with a new single-model approach
Lease Accounting for the Lessee
Commencement of the lease
- Recognize a lease liability measured at the present value of fixed minimum lease payments
- Recognize a right-to-use lease asset equal to the liability plus additional payments for the initial direct cost
During the lease term
- Right-to-use assets are amortized systematically over the shorter of the lease term or useful life of the asset
- Lease liability treatment is consistent with financing, recognizing interest expense over time based on the current balance of the lease and the implicit interest rate (incremental borrowing rate)
Financial Statement Impact for Lessee
- Expenditures and other financing sources (revenue) should be reported in the period the lease is initially recognized
- Report lease payment consistent with governmental fund accounting principles for all periods and consistent with debt service payments on long-term debt
Entity Wide Statements
- Initial Year – record right-to-use asset as a debit and a credit to the lease liability. The lease liability will have both the current and a non-current portion
- Subsequent Years – you will have decreased the lease liability, record interest expense, and credit case. You will also debit the amortization expense, right-to-use, and accumulated amortization
ST-3 Reporting for Lessee
- Schedule of Non-Current Governmental Assets – debit to intangible lease assets and credit to your total non-current governmental assets
- Schedule of Non-Current Governmental Liabilities – debit to total non-current governmental liabilities and credit to your lease liability
Lease Accounting for the Lessor
Commencement of the lease
- Recognize lease receivable measured at the present value of the lease payments
- Recognize deferred inflow of resources equal to the receivable plus any payments received at or before the commencement of the lease term related to future periods
During the lease term
- Recognize interest revenue and lease revenue in a systematic manner over the term of the lease
Financial Statement Impact for Lessor
- Record lease receivable at the beginning of the lease – debit lease receivables, credit deferred inflow of resources
- Subsequent years to record lease payments – debit cash and deferred inflow of resources, credit lease receivable, and lease revenue
GASB 96 Subscription-Based Information Technology Arrangements (SBITAs)
These are very similar to GASB 87, but for IT arrangements. A SBITA is a contract that conveys control of the right to use another party’s (a SBITA vendor’s) IT software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in exchange or exchange-like transaction. They are effective for periods beginning after June 15, 2022, applied retroactively, with early implementation encouraged
This does not apply to certain transactions such as:
- Contracts that convey control of the right to use another party’s combination of IT software and tangible capital assets that meet the definition of a lease in Statement No. 87 (software on laptops)
- Governments that provide the right to use their IT software and associated tangible capital assets to other entities through SBITAs
- Contracts that meet the definition of a public-private partnership
- Licensing arrangements that provide a perpetual license to governments to use a vendor’s computer software, which is subject to Statement 51, Accounting and Financial Reporting for Intangible Assets, as amended
All SBITAs meet the definition of a lease; the accounting depends on what the underlying asset is, for example:
- Tangible capital asset alone – follow GASB 87
- IT software alone – follow GASB 96
- Combination of both
- Need to determine the significance of software and if insignificant then GASB 87 otherwise GASB 96 (ex. Computer with added software)
Other factors to consider:
- Are you controlling the software needed to run the operation vs. a subscription to the content?
- Do you need software installed on your system to utilize the system?
About Bowers & Company CPAs
Dan Krol, CPA, Partner at Bowers & Company CPAs. Reach him at 315-234-1119 or email@example.com.
Andrew Swords, Senior Accountant at Bowers & Company CPAs. Reach him at firstname.lastname@example.org.
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