What You Need to Know: Leases

Leasing is an important activity for many state and local governments. It can be a financing option for obtaining access to certain necessary items—including vehicles, heavy equipment, and buildings.

The GASB issued an Exposure Draft for public comment that proposes to more closely align the accounting and financial reporting of lease transactions with their economic substance.
The GASB issued an Exposure Draft for public comment on February 8, 2016, that proposes to more closely align the accounting and financial reporting of lease transactions with their economic substance. The Exposure Draft, Leases, is based on the foundational principle that leases are financings of the right to use an underlying asset.

The Leases project was undertaken because the current leasing guidance predates the GASB and does not take into consideration the GASB’s conceptual framework, including definitions of assets and liabilities. As noted in the letter from the Chairman’s desk, the Board’s deliberations leading to this proposal were informed by private-sector requirements that recently have been reexamined by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Intended Benefits


The Board’s proposals would:
  • Provide financial statement users with better information to assess the obligations and costs related to a government’s leasing activities and the impact of those activities on the financial statements
  • Enhance comparability between governments by using a single classification for leases, and
  • Provide financial statement preparers and auditors with guidance that is more consistent and less complex.

Key Provisions


The Exposure Draft would apply to contracts that convey the right to use an underlying asset for a period. The lease term would be based on the period during which a lessee has a right, including certain options, to use an underlying asset.
The Board is proposing a new accounting model for both lessees and lessors that would eliminate the current and often complex distinction between operating and capital leases.

The Board is proposing a new accounting model for both lessees and lessors that would eliminate the current and often complex distinction between operating and capital leases. However, short term leases would be recognized as outflows of resources or inflows of resources, respectively, based on the payment provisions of the contract. A short-term lease would be defined as a lease that, at the beginning of the lease, has a maximum possible term under the contract of 12 months or less.

Lessee governments would report the following about leases (except short-term leases) in their financial statements:
  • An intangible lease asset that represents the government’s right to use the underlying asset
  • A corresponding lease liability
  • Amortization expense related to the lease asset, and
  • Interest expense related to the lease liability.
Government lessors would report the following about leases in their financial statements:
  • A receivable for the right to receive payments
  • A corresponding deferred inflow of resources
  • Lease revenue systematically over the term of the lease, and
  • Interest revenue related to the receivable.
The Exposure Draft carries forward the existing guidance for reporting information about leases in the governmental funds. Lessees would report lease payments consistent with the principles for general obligation debt. Lessors would report receivables and recognize the related deferred inflows of resources as revenue, if available, over the lease term.

Proposed notes to the financial statements for lessees address the nature, amount, and timing of lease payments. Proposed disclosures for lessors also focus on the risk that a lessor will not receive its lease payments.

Other issues addressed in the Exposure Draft include:
  • Lease terminations and modifications
  • Sale-leaseback and lease-leaseback transactions, and
  • Reporting nonlease components embedded in lease contracts, such as service agreements.

What’s Ahead?

As always, sharing your views with the Board is a critical element of this project.

As always, sharing your views with the Board is a critical element of this project. The deadline for submitting comments on the Exposure Draft is May 31, 2016. The GASB also will be conducting a public hearing in San Francisco on June 29, 2016.

Information about how to provide comment to the GASB or notify the Board of your intention to participate in the public hearing can be found at the front of the Exposure Draft.