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GASB 87: Single lease classification: What's changing and what you need to do


Under the old lease reporting standards, there were many similarities between governmental and non-governmental standards, so when FASB changed its guidance on leases last year, many expected a carbon copy of that from GASB. GASB did not follow suit with GASB 87.

The major difference between GASB 87 and FASB ASU 2016-02, (February 2016), is the accounting treatment for operating leases. Unlike FASB, GASB treats all leases as financing—there is no distinction between operating and financing lease classifications and you will have to report operating leases on the statement of net position.

There are two primary reasons why GASB strayed from FASB and felt changes to the existing standards were necessary:

  1. Under the new statement, lessees and lessors have to report leases under a single model and GASB felt this change improves comparability of financial statements, and;
  2. GASB felt expanded disclosures which relate to the timing, significance and purpose of the leasing arrangements provide financial statement users with useful decision-making information.

GASB 87 was published on June 28, 2017 (effective for reporting periods beginning after December 15, 2019). Early adoption is permitted with these impending changes coming. Some terms you need to know about:

Lease term: the period during which a lessee has a noncancelable right to use an underlying asset. Clauses, events and options within the lease agreement will likely result in modifications to the original lease term.

Short-term lease: maximum possible lease term of 12 months or less. Recognize lease payments as outflows or inflows of resources by the lessee and lessor.

Here is a brief summary of general accounting treatment by the lessee and lessor under GASB 87.

What is recognized at the beginning of the lease term

Lessee Lessor
Lease liability and a lease asset
Lease receivable and a deferred inflow of resources

How do you measure the lease?  

Lessee    Lessor

Lease liability: present value of payments expected to be made during the lease term

Lease asset: value of the lease liability plus payments made to the lessor at or before the beginning of the lease term and certain direct costs

Lease receivable: present value of lease payments expected to be received during the lease term

Deferred inflows of resources: value of the lease receivable plus any payments received at or before the beginning of the lease term that relate to future periods

What is the lease accounting treatment? 

Lessee Lessor

Lease liability: reduce liability as payments are made and recognize an outflow of resources for interest expense

Lease asset: amortize lease asset over the shorter of the lease term or useful life of the underlying asset

Lease receivable: recognize interest revenue on the receivable

Deferred inflows of resources: recognize revenue from the deferred inflows of resources over the term of the lease

What do you have to disclose in the financial statements? 

Lessee Lessor
You must disclose:

Description of leasing arrangement

Amount of lease assets recognized

Schedule of future lease payments to be made
You must disclose:

Description of leasing arrangement

Recognize total amount of inflows of resources from leases

How do you account for a terminated lease?

Lessee Lessor

Reduce the carrying value of the lease liability and lease asset

Recognize any difference as a gain or loss

Reduce the carrying value of the lease receivable and deferred inflows of resources

Recognize any difference as a gain or loss

Other transactions to consider:

  • Sublease: if the original lessee becomes a lessor in a sublease, account for the original lease and the sublease as separate transactions.
  • Sale-leaseback transaction: account for the sale and lease transactions separately. Record the difference between the carrying value of asset sold and the net proceeds from the sale as a deferred inflow or a deferred outflow of resources — recognize over the term of the lease.
  • Lease-leaseback transaction: account for as a net transaction and disclose the gross amount of each portion of the transaction.

Please contact Danielle Baron if you have questions on how to implement GASB 87.