GASB established a single approach to accounting for and reporting leases by local and state governments in a new statement issued Wednesday.
GASB Statement No. 87, Leases, is based on the principle that a lease finances the right to use an underlying asset. The standard offers guidance for nonfinancial assets, including vehicles, heavy equipment, and buildings. It excludes nonexchange transactions—including donated assets—and leases of intangible assets such as patents and software licenses.
The new statement was deemed necessary by GASB because the previous leasing guidance for state and local governments predated GASB and doesn’t take the board’s conceptual framework into consideration, including GASB’s definitions of assets and liabilities.
The previous standards allow a lease to be structured in a manner that avoids reporting the economic substance of the transaction. This can lead to a long-term liability where related assets were not reported as a result of the lease transaction.
“The new single model for reporting governmental leasing agreements is designed to result in greater transparency and usefulness for financial statement users,” GASB Chairman David A. Vaudt said. “It also is meant to reduce complexity in application for preparers and auditors of governmental financial statements.”
A lessee government—which pays to use another entity’s capital asset—is required under the new standard to recognize a lease liability and an intangible asset representing the lessee’s right to use the leased asset.
Likewise, a lessor government—one that leases its capital assets to others—must now recognize a lease receivable and a deferred inflow of resources. A lessor will continue to report the leased asset in its financial statements.
A lessee also will report the following in its financial statements:
- Amortization expense for using the lease asset, which is 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 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.
Limited exceptions to the single-approach guidance are provided for short-term leases (those lasting a maximum of 12 months at inception, including any options to extend); financed purchases; leases of assets that are investments; and certain regulated leases such as between municipal airports and air carriers.
The new statement is effective for reporting periods beginning after Dec. 15, 2019. GASB encourages earlier application.
—Anslee Wolfe is a freelance writer in Colorado Springs, Colo. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.