GASB proposes single approach for lease reporting

State and local governments would report leases based on the principle that leases are financings of the right to use an underlying asset, under a proposal GASB issued this week.

The proposal would provide guidance for lease contracts for nonfinancial assets, such as vehicles, heavy equipment, and buildings. The proposed guidance would not apply to grants, donated assets, or leases of intangible assets such as patents and software licenses.

The limited exceptions in the draft guidance include financed purchases and short-term leases of 12 months or less.

The exposure draft, Leases, would require a lessee government to recognize a lease liability and an intangible asset representing its right to use the leased asset. A lessor government would be required to recognize a lease receivable and a deferred inflow of resources.

Under the proposal, a lessee would also report:

• Amortization expense related to the lease asset, recognizing the asset amount as an expense over the term of the lease.
• Interest expense related to the liability.
• Note disclosures with information about the lease, including a general description of the leasing arrangement.

The proposal also would require a lessor to report:

• Lease revenue and a corresponding reduction in the deferred inflow over the term of the lease.
• Interest revenue related to the receivable.
• Note disclosures with information about the lease, including a general description of the leasing arrangement.

“This proposal would more closely align the accounting and financial reporting for leases with the substance of these arrangements,” GASB Chair David Vaudt said in a news release. “Establishing a single model for reporting governmental leasing agreements should result in greater transparency and usefulness for financial statement users and reduced complexity in application for state and local government preparers and auditors.”

Comment can be submitted by email to director@gasb.org by May 31.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.