Project Pages

Leases—Reexamination of NCGA Statement 5 and GASB Statement 13

Project Description: The objective of this project is to reexamine issues associated with lease accounting, considering improvements to existing guidance. Current guidance is provided by National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, GASB Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. Statement 62 incorporated the provisions of FASB Statement No. 13, Accounting for Leases, as amended and interpreted, into the GASB’s authoritative literature.

Status:
Exposure Draft approved: January 2016
Preliminary Views approved: November 2014
Added to Current Agenda: April 2013
Added to Research Agenda: April 2011

Leases—Project Plan

Background: Governments routinely enter into leases. Under the current authoritative literature, many of these leases are reported as operating leases. Even though operating leases represent long-term commitments to make payments, no liabilities are reported, although there are disclosures. Likewise, no assets are reported when governments have long-term rights to receive operating lease payments. In Concepts Statement No. 4, Elements of Financial Statements, the Board established definitions of assets and liabilities. This project provides an opportunity for the Board to consider whether operating leases meet the definitions of assets or liabilities.

In 2010 and 2013, the FASB and the International Accounting Standards Board (IASB) issued Exposure Drafts proposing to replace private sector guidance for leases. The FASB and IASB issued final guidance in February and January 2016, respectively. Because of the similarities between private-sector leasing guidance and current public-sector leasing guidance and the significant changes of the FASB/IASB project, the staff received technical inquiries regarding whether there are any plans for the GASB to update its leasing guidance.

The GASB undertook this project during the final stages of the similar FASB and IASB projects in order to maximize efficiency and timeliness. A simultaneous lease accounting project on the GASB agenda provided the opportunity to follow the progress of the FASB and IASB projects to assess on a contemporaneous basis new or amended leasing guidance in the context of the state and local government environment. The GASB project provides an opportunity to reassess the existing GASB guidance, as well as consider improvements in the FASB and IASB projects in the context of the unique nature of governmental entities and the complexities of their leasing transactions.

Finally, part of the GASB’s strategic plan is to evaluate the effectiveness and impact of existing standards that have been in effect for a sufficient length of time. NCGA Statement 5 was issued in 1982 and GASB Statement 13 in 1990.

Accounting and Financial Reporting Issues: The major topic being considered is the forms of financial reporting display and disclosure that would meet essential financial statement user needs. The project is considering the following issues:
  1. Are current accounting and financial reporting standards, including the distinction between types of leases, appropriate to meet essential user needs?
  2. If current standards are not considered adequate, what other requirements should be considered?
Project History:
  • Pre-agenda research approved: April 2011
  • Added to current technical agenda: April 2013
  • Task force established? Yes
  • Deliberations began: August 2013
  • Preliminary Views approved: November 2014
  • Comment period: November 2014–March 2015
  • Field test completed: March 2015
  • Public hearings held: April 2015
  • Redeliberations began: April 2015
  • Exposure Draft issued: January 2016
  • Comment period: January–May 2016
  • Public hearing held: June 2016
  • Redeliberations began: August 2016
Current Developments: At the September through December 2016 meetings, the Board redeliberated the proposals in the Exposure Draft, Leases, including the foundational principle of leases as financings, cash flows and revenue/expense classification, the short-term lease exception, the lessee reporting model, lessee disclosures, the lessor reporting model, lessor disclosures, and leases that transfer ownership.

Work Plan:

Board meetings

Topics to be considered

February 2017 T/C): Discuss lease incentives, multiple lease components and contract combinations, and transition and effective date. Reconsider costs and benefits of proposed guidance and GASB scope of authority.
April 2017: Review preballot draft of a final Statement.
May 2017 (T/C): Review ballot draft and consider a final Statement for approval.

Leases—Recent Minutes


Minutes of Meetings, January 17-19, 2017

The Board continued redeliberations on the proposals in the Exposure Draft, Leases.

The Board tentatively decided to carry forward an exception to the proposed lessor recognition and measurement guidance for certain regulated leases, such as airport-aeronautical agreements and other leases with similar characteristics, but with modifications to address respondent concerns. The Board tentatively agreed that, to qualify for the exception, the lease must be subject to external laws, regulations, or legal rulings that establish all of the following requirements: (a) the lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator; (b) lease rates should be similar for lessees that are similarly situated; and (c) the lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided that the lessee’s use of the facilities complies with generally applicable use restrictions.

The Board next discussed additional research on the proposed general lessor disclosure in paragraph 49b, which would require disclosure of the carrying amount (and accumulated depreciation) of assets on lease, or held for leasing, by major classes of assets. The Board tentatively decided not to carry that disclosure forward (except for certain regulated leases). The Board next tentatively agreed to carry forward the proposed disclosures for certain regulated leases, with modifications intended to conform with edits tentatively made to the general lessor disclosure requirements.

Next, the Board discussed, and tentatively agreed to carry forward, the provisions in paragraphs 63–68 of the Exposure Draft for lease terminations and modifications, with clarifying edits.

The Board then discussed the provisions in paragraphs 69 and 70 for sublease transactions. The Board tentatively agreed to carry forward those provisions and to add a discussion in the Basis for Conclusions explaining why a transaction that relieves the original lessee of its obligation under the lease is a lease termination rather than a sublease.

The Board also tentatively agreed to carry forward the provisions in paragraphs 71–75 of the Exposure Draft regarding the treatment for sale-leaseback and lease-leaseback transactions, with clarifying edits.

The Board tentatively decided to carry forward the provisions in paragraphs 76 and 77 for the treatment of intra-entity leases and leases between related parties, without modifications.

Lastly, the Board reviewed aspects of the proposed lessee and lessor reporting models for which symmetry of accounting had not been fully achieved. The Board tentatively agreed that the remaining areas of differences between lessee and lessor accounting are warranted.

Minutes of Meetings, December 5-8, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the following topics: the lessor model, lessor disclosure requirements, and the notion of symmetry between the proposed accounting guidance for lessees and lessors.

The Board tentatively agreed to carry forward the provision that a lessor should recognize a lease receivable and a deferred inflow of resources at the beginning of the lease term and any initial direct costs as an outflow. The Board also tentatively agreed to carry forward the provisions for initial measurement of the lease receivable.

The Board next discussed the provisions of the Exposure Draft regarding the calculation of interest revenue and remeasurement of the lease receivable and tentatively decided to carry these provisions forward. Consistent with the Board’s tentative modifications to the lessee remeasurement guidance, the Board tentatively decided to add a remeasurement criterion for when a contingency is resolved at a later date such that variable payments become fixed. The Board also tentatively decided to make additional modifications to paragraphs 42 and 43 to conform with modifications tentatively made to the lessee remeasurement guidance, and to provide related edits to the explanations in paragraph B34. In addition, the Board tentatively decided to modify the language in paragraphs 42 and 43 (and in related lessee remeasurement guidance) to clarify that assessment of the need to remeasure is based on the effects of the collective changes since the previous measurement.

The Board then discussed the provisions in the Exposure Draft regarding the reporting of a deferred inflow of resources and tentatively decided to carry them forward with a minor technical modification.

The Board next discussed and tentatively decided to carry forward the provisions regarding lessor reporting of the underlying asset and to add an explanation in the Basis for Conclusions that asset retirement obligations related to the underlying asset are addressed by Statement 83.

The Board next tentatively agreed to carry forward the provision that lessors not apply the recognition and measurement provisions to leases of assets that are investments.

In response to respondent comments, the Board considered a potential exception to the lessor recognition and measurement guidance for nonaviation leases at airports, such as concession leases. The Board tentatively agreed that an exception is not appropriate.

In addition, the Board tentatively agreed to carry forward the provisions for reporting in governmental funds, with a minor technical modification. The Board also tentatively decided to modify the language in the Basis for Conclusions to clarify that a lease receivable is reported at its full amount in governmental funds regardless of whether amounts are available.

Next, the Board discussed the lessor disclosure requirements. The Board tentatively agreed that the lessor disclosure requirements should be carried forward. The Board tentatively agreed that additional disclosures regarding the existence of renewal and termination options is not needed. Lastly, the Board tentatively agreed to modify paragraph 49c to clarify the nature of the disclosure.
The Board also discussed the notion of symmetry between the proposed accounting guidance for lessees and lessors. The Board members tentatively agreed that symmetry between lessee and lessor accounting continued to be an important consideration that should be carried forward.

Minutes of Meetings, October 25-27, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the following topics: the lessee model, contracts that are treated as financed purchases, leases with purchase options, and lessee disclosure requirements.

The Board tentatively agreed to carry forward the provision that the lease liability and intangible right-to-use lease asset be recognized at the beginning of the lease term. The Board redeliberated on the provisions for the initial measurement of the lease liability, including comments received from some respondents to the Exposure Draft regarding lease incentives. The Board tentatively agreed to carry forward, without amendment, the provisions for initial measurement of the lease liability.

The Board next discussed the provisions in paragraphs 17 and 18 of the Exposure Draft for discounting of the lease liability. The Board tentatively agreed to carry forward the provision for discounting the lease liability. The Board also tentatively agreed to remove the discussion from paragraph B32 of the Exposure Draft that some may consider to be guidance relating to discounting.

The Board next redeliberated the criteria for remeasurement of the lease liability and tentatively decided to carry them forward. In response to respondent comments, the Board tentatively decided to provide edits that clarify, among other things, that the changes identified in paragraph 19 and 21 are not lease modifications and that the significance of the changes should be considered both individually and in the aggregate. The Board also tentatively decided to add a remeasurement criterion for when a contingency is resolved at a later date, after which variable payments become fixed.

The Board then discussed the provisions regarding the lease asset, specifically addressing respondent comments concerning the treatment of leasehold improvements and the amortization of the lease asset. The Board tentatively decided to add lessor-provided leasehold improvements as an example of a lease incentive in the Basis for Conclusions and to clarify that interest and amortization expense are to be reported separately. In addition, the Board tentatively agreed to carry forward the provisions for reporting in governmental funds with clarifying edits.

The Board also discussed contracts that transfer ownership. The Board tentatively agreed to carry forward the provision, with clarifying edits, that contracts that transfer ownership be reported as financed purchases or sales of the asset. The Board tentatively agreed not to include further guidance on this topic in the final Leases Statement. The Board also reaffirmed its prior tentative decision that leases containing purchase options that the lessee is reasonably certain of exercising should be treated as a lease, not as a financed purchase or sale.

Next, the Board discussed the lessee disclosure requirements. The Board tentatively agreed not to provide guidance regarding where to place and how to structure lease disclosures in the notes to the financial statements, including commitments under leases that have not yet begun. The Board noted that preparers should continue to use professional judgment to determine how to present the proposed disclosure requirements in a manner that is useful and understandable to users. The Board also tentatively agreed that the lessee disclosures should be carried forward to the final Statement. The Board tentatively agreed that the disclosures should not be amended to specifically address concerns regarding impacts on competitive advantage. Additionally, the Board tentatively agreed that a statement of objectives for the notes was not essential and that additional disclosures were not needed. Lastly, the Board also tentatively agreed to modify paragraph 31a(2) to limit its applicability to residual value guarantees not included in the lease liability, parallel to the requirement in paragraph 31a(1).

Minutes of Meetings, September 13-15, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the foundational principle, the classification of cash flows related to a lease transaction, and the definition of a short-term lease.

The Board redeliberated the foundational principle of the proposed leases guidance that leases within its scope are financings of the right to use an underlying asset. After considering respondent comments, the Board tentatively agreed that the foundational principle should be carried forward to the final Statement.

The Board next discussed the classification of cash flows related to leases. In response to informal feedback and comments made at the public hearing, the Board tentatively decided to amend paragraph 13 of the Exposure Draft to explicitly state that a lessee’s intangible right-to-use lease asset is a capital asset. The Board also tentatively decided that guidance on the reporting of leases in the statement of cash flows should not be included in the Standards section of the final Statement. However, the Board did not object to including conforming amendments to Question 2.27.5 of Implementation Guide 2015-1 in the codification instructions of the final Statement. This question had been proposed for deletion through the Exposure Draft’s codification instructions, but, with the proposed amendments, it would address the categorization of the cash flows among operating, noncapital financing, and capital and related financing activities.

During the discussion regarding the short-term lease exception, the Board tentatively agreed to carry forward the concept of “maximum possible term” in the definition of a short-term lease. The Board also tentatively decided that lessee-only cancelation options should not affect the determination of the maximum possible term. Therefore, the Board tentatively decided to delete the third sentence of paragraph 60 of the Exposure Draft, which proposed a different notion of maximum possible term for leases cancelable only by the lessee. The Board also tentatively decided to carry forward the maximum possible term provision for a short-term lease—12 months or less. Finally, the Board considered clarifying edits to the short-term leases reporting guidance in paragraphs 61 and 62 of the Exposure Draft and tentatively approved edits so that the guidance would state what should be reported rather than what should not be reported.

Minutes of Meetings, August 10-12, 2016

The Board started redeliberations on the proposals in the Exposure Draft, Leases, commencing with the following topics: the definition of a lease, the scope of the leases guidance, and the lease term. The Board tentatively concluded that further guidance is not needed to clarify that the right-to-use asset is an intangible asset. The Board also tentatively concluded that further guidance is not needed on the degree of formality needed for a lease contract.

The Board next considered respondent comments about power purchase agreements, grazing and hunting rights, and land use agreements for farming, and tentatively agreed that explicitly mentioning the notion of control in the definition of a lease could help in determining situations in which contractual arrangements meet the definition of a lease. In further consideration of respondent comments about the definition of a lease, the Board tentatively decided to specifically note that the right to use a nonfinancial asset refers to the right to use another entity’s underlying asset. Thus, the definition of a lease would refer to “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset)” (emphasis added). The Board also tentatively decided that the right-to-use asset should be what is “specified in the contract,” which would include the right to use the underlying asset for portions of time during a lease term, such as leases for certain days each week or for certain hours each day.

The Board also tentatively agreed to add guidance for determining when a lease contract conveys control of the right to use the underlying asset. The guidance would be similar to the FASB guidance but would be based on the notions of control found in Concepts Statement No. 4, Elements of Financial Statements, including (1) the right to obtain the present service capacity from use of the underlying asset and (2) the right to determine the nature and manner of use of the underlying asset. The control criteria would be applied to the right-to-use asset as specified in the contract. The Board tentatively agreed that the criteria would not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.

The Board tentatively agreed to specifically exclude all supply contracts (such as power purchase agreements) from the scope of the leases guidance. In further considering hunting and grazing rights, the Board tentatively agreed that no additional guidance in the final Statement was considered necessary. With reference to comments about substantive rights of substitution, the Board tentatively agreed that the definition of a lease does not need to explicitly state that the asset be identified. The Board also tentatively agreed that additional guidance for determining when a substantive right of substitution exists was not considered necessary in the final Statement.

The Board next discussed issues primarily related to the scope of the guidance and tentatively decided not to add infrastructure as an example of a nonfinancial asset. The Board tentatively agreed to add inventory to the scope exclusions in the final Statement. The Board tentatively concluded that historical works of art and assets under construction should not be excluded from the scope of the leases guidance. The Board also tentatively reaffirmed that the following should not be excluded from the scope of the final Statement: leases of assets that are investments, certain regulated leases, and short-term leases.

The Board tentatively concluded that no further guidance was necessary for determining whether cell phone tower and antenna placement agreements are leases.

The Board tentatively decided to add “living plants, and living animals” after timber as examples of biological assets rather than defining that term. The Board next tentatively agreed that additional guidance for contracts that involve both software and hardware and for contracts for cloud services and hosting services was not necessary at this time.

The Board tentatively agreed to not provide a quantitative threshold exception for lower value leases in the final Statement.

The Board tentatively agreed to supersede paragraphs 221, 225, 239, 240, and 254 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and incorporate them into the final Statement. The Board also tentatively decided that leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor should be excluded from the scope of the final Statement.

During the discussion regarding the lease term, the Board tentatively agreed to carry forward the requirement to include lessee renewal and termination options when assessing the lease term at the beginning of a lease. The Board also tentatively agreed that lessor-only options to extend (or not to terminate) the lease should be included in the lease term assessment. Lessees and lessors would be required to evaluate lessor-only options in the same manner as other options, based on whether it is reasonably certain that the option will be exercised.

The Board tentatively agreed to provide examples of cancelable periods and additional clarifying guidance in the text of the standard. The Board also considered comments on the probability threshold of reasonably certain used in evaluating the likelihood of an option being exercised and tentatively decided to carry that threshold forward. The Board tentatively agreed that no additional guidance is needed with respect to fiscal funding or cancellation clauses and nonpayment issues.

The Board tentatively decided to carry forward the lease term reassessment criteria from the Exposure Draft to the final Statement. The Board also tentatively decided to add the following criterion to the lease term reassessment criteria: “an event specified in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term.”

Minutes of Meetings, June 22-23, 2016

The Board reviewed a summary of due process comments received on the Exposure Draft, Leases. The Board provided comments on issues raised in respondent comments and discussed issues to be addressed in future redeliberations. No tentative decisions were reached by the Board.

Minutes Archive

Leases—Tentative Board Decisions to Date


These tentative decisions have been made since the issuance of the Exposure Draft and in anticipation of the final Statement. The Board tentatively agreed to propose the following:
  • The definition of a lease should include the notion of control, and should clarify that the right to use a nonfinancial asset refers to the right to use another entity’s underlying asset, by stating that a lease contract “conveys control of the right to use another entity’s nonfinancial asset (the underlying asset).”
  • The right-to-use asset should be what is “specified in the contract,” which would include the right to use the underlying asset for portions of time during a lease term, such as leases for certain days each week or certain hours each day.
  • Guidance on when the contract conveys the control of the right to use the underlying asset should be provided. The guidance should be based on the notions of control found in Concepts Statement No. 4, Elements of Financial Statements, including (1) the right to obtain the present service capacity from use of the underlying asset and (2) the right to determine the nature and manner of use of the underlying asset. The control criteria should be applied to the right to use asset as specified in the contract. The criteria should not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.
  • Exclude all supply contracts, such as power purchase agreements, from the scope of the leases guidance.
  • Exclude inventory from the scope of the leases guidance.
  • Clarify that the scope exclusion of leases of biological assets includes timber, and “living plants, and living animals.”
  • Supersede and incorporate into the final Statement paragraphs 221, 225, 239, 240, and 254 of Statement 62.
  • Carry forward the exclusion of leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
  • Carry forward the requirement to include lessee renewal and termination options when assessing the lease term at the beginning of a lease.
  • Include lessor-only options to extend (or not to terminate) the lease if reasonably certain of being exercised in the assessment of the lease term at the beginning of a lease
  • Remove periods “for which only the lessor has the option to terminate the lease” from cancelable periods.
  • Carry forward the probability threshold of reasonably certain used in evaluating the likelihood of an option being exercised in the assessment of the lease term.
  • Carry forward the criteria for reassessment of the lease term, with edits to incorporate the following additional criterion:
    • An event written in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term.
  • Carry forward the foundational principle that leases within the scope of the proposed Statement are financings of the right to use an underlying asset.
  • Explicitly state that a lessee’s intangible right-to-use lease asset is a capital asset.
  • Include in the codification instructions conforming amendments to Question 2.27.5 of Implementation Guide 2015-1 to address the categorization of the leases cash flows between operating, noncapital financing, and capital and related financing activities.
  • Carry forward the proposal that the maximum possible term for a short-term lease be 12 months or less.
  • Carry forward the short-term lease definition as “a lease that, at the beginning of the lease, has a maximum possible term under the contract of 12 months or less, including any options to extend, regardless of their probability of being exercised.”
  • Carry forward the provision that a lessor recognize a lease receivable and a deferred inflow of resources at the beginning of the lease term and any initial direct costs as an outflow.
  • Carry forward the provisions for initial measurement of the lease receivable.
  • Carry forward the criteria for remeasurement of the lease receivable, with clarifying edits and the addition of the following criterion:
  • A contingency, upon which some or all of the variable lease payments that will be received over the remainder of the lease term are based, is resolved such that those payments now meet the definition of lease payments included in the lease receivable under paragraph 37. For example, an event occurs that results in variable lease payments that were contingent on the performance or use of the underlying asset becoming fixed payments for the remainder of the lease term.
  • Carry forward provisions for reporting deferred inflows of resources with a minor technical modification.
  • Carry forward the provision for lessor reporting of the underlying asset to the final Statement.
  • Carry forward the provision that lessors not apply the recognition and measurement provisions of the Leases guidance for leases of assets that are investments.
  • Carry forward the provisions for reporting in governmental funds with a minor technical modification.
  • Carry forward the proposed lessor disclosure requirements, with minor technical modifications.
  • Carry forward a modified exception to the proposed lessor recognition and measurement guidance for certain regulated leases, such as airport-aeronautical agreements and other leases with similar characteristics. To qualify for the exception, the lease must be subject to external laws, regulations, or legal rulings that establish all of the following requirements: (a) the lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator; (b) lease rates should be similar for lessees that are similarly situated; and (c) the lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided that the lessee’s use of the facilities complies with generally applicable use restrictions.
  • Not carry forward the general lessor disclosure in paragraph 49b, which would require disclosure of the carrying amount (and accumulated depreciation) of assets on lease or held for leasing, by major classes of assets.
  • Carry forward the proposed disclosures for certain regulated leases, with clarifying edits intended to conform with edits tentatively made to the general lessor disclosure requirements.
  • Carry forward, the provisions for lease terminations and modifications, with a minor technical correction.
  • Carry forward the provisions for sublease transactions, without modification.
  • Carry forward the provisions for sale-leaseback and lease-leaseback transactions, with clarifying edits.
  • Carry forward the provisions for the treatment of intra-entity leases and leases between related parties, without modification.