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: The comment period for the Exposure Draft, Leases, ended on May 31, 2016, and a public hearing was held. Redeliberations on the proposals in the Exposure Draft commenced at the August 2016 Board meeting.

Work Plan:

Board meetings

Topics to be considered

December 2016:

Discuss the lessor model, including lease receivable, deferred inflows of resources, leases that transfer ownership—lessors, leases of assets that are investments, and lessor disclosures.

January 2017: Discuss multiple lease components and contract combinations, lease terminations and modification, subleases, leasebacks, intra-entity leases, leases between related parties, and transition and effective date.
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, 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 of Teleconference, January 25, 2016

The Board reviewed a ballot draft of an Exposure Draft of a proposed Statement, Leases, and provided clarifying edits on the draft document. The Board then voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, January 5-6, 2016

The Board reviewed a preballot draft of the proposed Exposure Draft, Leases, and provided clarifying edits on the draft document. The Board tentatively decided that the Exposure Draft should propose that only governments whose principal ongoing operations consist of leasing assets to other entities be required to disclose future lease payments that are included in the lease receivable, showing principal and interest separately.

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.”