Governmental Accounting Standards Update: 3/21/19
The Governmental Accounting Standards Board (GASB) has issued Statement No. 87, Leases, in an effort to provide information that is more relevant and consistent related to the reporting of leases by governments. Effective for reporting periods after Dec. 15, 2019, this statement requires lessees to recognize a lease liability and a right-to-use asset for all leases regardless of classification. It also requires a lessor to recognize a lease receivable and a deferred inflow of resources.
Definition of a Lease
Statement No. 87 defines a lease as “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.” Examples of nonfinancial assets include buildings, land, vehicles, and equipment. If a contract does not meet this definition, it would not be within the scope of Statement No. 87.
The statement provides an exemption for leases that are classified as short-term; these leases have a maximum possible term of 12 months, including all options to extend (regardless of the probability of the option being exercised). Lessees and lessors should account for short-term leases as outflows of resources or inflows of resources, respectively, based on the payment provisions within the contract. Assets and liabilities should be recognized based on the timing of payments in relation to their due dates. Additionally, neither the lessee nor the lessor would recognize any outflow or inflow of resources during a rent holiday period.
A lessee should recognize a lease liability and a lease asset (right-to-use asset) at the commencement of the lease term. The exception to this is if the lease is a short-term lease or transfers ownership of the underlying asset, which then would be recognized as a financed purchase of the asset. The balance for the lease liability should be equal to the present value of payments (less any incentives) expected to be made during the lease term. The balance of the lease asset should be equal to the amount of the initial measurement of the lease liability plus any payments made to the lessor at or before the commencement of the lease term and certain initial direct costs.
When payments are made, the lessee would reduce the lease liability and recognize an outflow of resources (such as interest expense) for interest on the lease liability. The lease asset is amortized as an outflow of resources (such as amortization expense) over the shorter of the lease term or the useful life of the underlying asset.
A lessor should recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term – except for leases of assets held as investments, certain regulated leases, short-term leases, and leases that transfer ownership of the underlying asset. The asset underlying the lease would continue to be reported as an asset. The lease receivable should be measured at the present value of lease payments expected to be received during the lease term. The deferred inflow of resources should be measured at the value of the lease receivable plus any payments received at or before the commencement of the lease term that related to future periods.
A lessor should recognize interest revenue on the lease receivable and an inflow of resources (such as lease revenue) from the deferred inflows of resources over the term of the lease.
Disclosure Requirements – Lessees
For lessees, Statement No. 87 requires the following disclosures related to lease activities:
- A general description of leasing arrangements, including information about variable payments and residual value guarantees provided by the lessee that are not included in the calculation of the lease liability
- The total amount of lease assets and related accumulated amortization
- The amount of lease assets by major classes of underlying assets
- The amount of outflows of resources recognized in the period for variable payments and other payments that were not previously included in the lease liability, such as residual value guarantees or termination penalties
- The principal and interest requirements to maturity for each of the five subsequent fiscal years and in five-year increments thereafter
- Any commitments under leases before the commencement of the lease term
- The components of any loss associated with an impairment
Statement No. 87 also requires additional disclosures for subleases, sale-leaseback transactions, and lease-leaseback transactions. Short-term leases are exempt from the above disclosures.
Disclosure Requirements – Lessor
For lessors, Statement No. 87 requires the following disclosures related to lease activities:
- A general description of leasing arrangements, including information about variable payments not included in the calculation of the lease receivable
- The amount of inflows of resources (for example, lease revenue and interest revenue) recognized from leases during the period if they are not displayed separately on the face of the financial statements
- The amount of inflows of resources recognized in the period for variable and other payments that were not previously included in the lease liability, such as residual value guarantees or termination penalties
- If the lessor has issued debt for which the principal and interest payments are secured by the lease payments, information related to any lessee options to terminate the lease or abate payments
- If principal ongoing operations consist of leasing assets to other entities, a schedule of future payments related to the lease receivable, with principal and interest for each of the five subsequent fiscal years and in five-year increments thereafter
Statement No. 87 also requires additional disclosures for leases that are investments, certain regulated leases, subleases, sale-leaseback transactions, and lease-leaseback transactions. Short-term leases and certain regulated leases are exempt from the above disclosures.
Effective Date and Transition
Statement No. 87 is effective for reporting periods beginning after Dec. 15, 2019; however, earlier application is encouraged.
Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation or, if applied to earlier periods, the beginning of the earliest period restated. However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases become the carrying values of the underlying assets.
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