Leases

Why Was New Leasing Guidance Needed?

GASB Statement No. 87, Leases, provides guidance for lease contracts for nonfinancial assets—including vehicles, heavy equipment, and buildings—but excludes nonexchange transactions, including donated assets, and leases of intangible assets (such as patents and software licenses).

The Board initiated the project because the previous leasing guidance predates the GASB and doesn't take the conceptual framework into consideration—including the definitions of assets and liabilities. Moreover, the prior lease standards allow a lease to be structured in a manner that avoids reporting the economic substance of the transaction. That is, a long-term liability and related asset were not reported as a result of the lease transaction.

Through the leasing guidance, the Board is seeking to align the accounting and financial reporting of lease transactions more closely with their economic substance. The guidance is based on the underlying principle that leases are financings of the right to use an underlying asset for a period of time. It will eliminate the current distinction between operating and capital leases by treating all leases as financings.

Board deliberations in the leases project were informed by private-sector lease requirements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which recently reexamined their leases standards.

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Is the Lease Definition Impacted?

The definition of a lease has changed under the new guidance. The definition now focuses on a contract that conveys control of the right to use another entity’s non-financial asset, which is referred to in the new Statement as the underlying asset.


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What is the Lease Term?

The lease term is the period during which the lessee has a noncancelable right to use an underlying asset, adjusted for certain options to extend or terminate the lease.

The standard provides an exception for short-term leases, which are lease that, at their beginning, have a maximum possible term of 12 months or less. These leases are recognized based on the payment provisions of the contract.



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What is the GASB Requiring?

Under Statement 87, a lessee government is required to recognize (1) a lease liability and (2) an intangible asset representing the lessee’s right to use the leased asset. A lessor government is required to recognize (1) a lease receivable and (2) 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 (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.

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What is Next?

Statement No. 87 is available for download at no charge from the GASB website. Printed copies of the Statement are also available for purchase in the GASB Store.

The requirements of the Statement are effective for reporting periods beginning after December 15, 2019, with earlier application encouraged.

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