On June 28, the Governmental Accounting Standards Board (GASB) issued a new standard with guidance that establishes a single approach to accounting for and reporting leases by state and local governments. The new standard, GASB Statement 87, Leases, is based on the principle that leases are financing of the right to use an underlying asset. Statement 87 provides guidance for lease contracts for nonfinancial assets—including vehicles, heavy equipment and buildings—but excludes nonexchange transactions, including donated assets, and leases of intangible assets (such as patents and software licenses). Statement 87 provides exceptions from the single-approach for short-term leases, financial purchases, leases of assets that are investments and certain regulated leases. Statement 87 also addresses accounting for lease terminations and modifications, sale-leaseback transactions, nonlease components embedded in lease contracts (such as service agreements) and leases with related parties.
Under the new standard, a lessee government is required to recognize a lease liability and an intangible asset representing the lessee’s right to use the leased asset. The liability should be the present value of the payments covered by the contract, and its value should be reduced as payments are made over the lease’s term. The asset should equal the initial measurement of the liability. A lessee also will report the following in its financial statements:
- Amortization expense for using the lease asset (similar to depreciation) over the shorter of the term of the lease or the useful life of the underlying asset
- Interest expense on the lease liability
- Note disclosures about the lease, including a general description of the leasing arrangement, the amount of lease assets recognized, and a schedule of future lease payments to be made
A lessor government is required to recognize a lease receivable and a deferred inflow of resources. A lessor will continue to report the leased asset in its financial statements. A lessor also will report the following in its financial statements:
- Lease revenue, systematically recognized over the term of the lease, corresponding with the reduction of the deferred inflow
- Interest revenue on the receivable
- Note disclosures about the lease, including a general description of the leasing arrangement and the total amount of inflows of resources recognized from leases
Effective Date and Transition
The provisions of Statement 87 are effective for reporting periods beginning after December 15, 2019. Earlier application is encouraged.
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