This guidance does not represent legal or investment advice. Please consult with your legal counsel regarding the interpretation of language in leases, contracts, and other agreements.
| Quick Links |
| Preparing for GASB 87 – Leases |
| Where do I start? |
| GAAP Basis Accounting *Updated 12/14/2022 |
| GAAP Lessee Accounting |
| GAAP Lessor Accounting |
| GAAP Basis Lease Notes *Updated 12/13/2022 |
| Cash Basis Accounting *Updated 12/13/2022 |
| Cash Basis Lease Note *Updated 12/13/2022 |
| Schedule 09 / Schedule of Liabilities Reporting |
| GAAP Basis FAQ |
| Cash Basis FAQ |
| Resources and Video |
Preparing for GASB 87 – Leases
GASB Statement No. 87, Leases, is effective for fiscal years ending June 30, 2022 and after. (Note the new implementation date – see Accounting Delays webpage for more information.)
The new standard applies not only to new lease agreements going forward, but also retroactively to existing agreements. Governments will need to identify the population of current leases to ensure they are included in the implementation of the standard.
Implementation of the standard can be time consuming because governments may have a significant number of leases administered de-centrally across the organization, making it a challenge to identify and determine which agreements are subject to the new accounting and financial reporting requirements.
Where do I start?
Start by familiarizing yourself with the new standard.
Create an inventory of existing leases and other contracts and agreements for review. Effective communication between departments will be necessary to ensure all leases are identified.
Determine which agreements meet the definition of a lease and which can be excluded. Just because the word “lease” isn't in the agreement, doesn't mean it doesn't meet the definition of a lease under GASB 87. And not all “leases” meet the definition of the new standard. It's the substance of the agreement that you must analyze – and document.
Document key provisions of each lease agreement such as the lease term, extensions, termination provisions, payment provisions, and an implied interest rate.
Key Definitions – Here are some key definitions and concepts you'll need for your analysis:
Lease – A contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.
Right to use – The right to obtain the present service capacity from use of the underlying asset and the right to determine the nature and manner of its use.
Lease term – The period during which a lessee has a non-cancelable right to use an underlying asset, plus periods covered by a lessee's or lessor's option to extend the lease (if reasonably certain the option will be exercised) and periods covered by the lessee's or lessor's option to terminate the lease (if reasonably certain the option will not be exercised). Note that periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party or if both parties have to agree to extend, are excluded from the lease term.
Exceptions/Exclusions:
Not all leases will be subject to the accounting and reporting requirements of GASB 87. Here are examples of some common scope exclusions:
- Short-term leases – Leases that have, at the commencement of the lease, a maximum possible term of 12 months or less, including any options to extend. For example, month-to-month leases. The lease payments will simply be recognized as revenue by the lessor and expenses/expenditures by the lessee.
- Contracts that transfer ownership (formerly known as a capital lease) – A contract that transfers ownership of the underlying asset to the lessee by the end of the contract and does not contain termination options should be reported as a financed purchase by the lessee or a sale by the lessor.
- Intangible assets – Such as mineral rights, patents, software, copyrights. Except for the sublease of an intangible right-to-use asset created by the original lease of a tangible underlying asset.
- Biological assets – Such as timber, living plants, living animals.
- Leases of inventory.
- Service concession arrangements – These are covered by GASB 60.
- Assets financed with outstanding conduit debt – Unless both the asset and conduit debt are reported by the lessor.
- Supply contracts – Such as power purchase agreements.
- Certain regulated leases – Such as aviation leases between airports and air carriers.
GAAP Basis Accounting
The finalized GAAP BARS manual leases section found at BARS GAAP 3.4.1 Leases. If you have any questions on the updated BARS guidance, please submit a HelpDesk.
Lessee Accounting (GAAP)
Government-wide statements and proprietary funds:
- At the start of the lease term, a lessee should recognize a lease liability and an intangible right-to-use lease asset.
- (DR) Lease Asset – Measured as the sum of the initial measurement of the lease liability – plus any initial direct costs and lease payments made prior to the start of the lease, less any lease incentives.
- (CR) Lease Liability – Initially measured at the present value of payments expected to be made during the lease term.
- (CR) Cash (possible entry) – for payment of any initial direct costs and lease payments made prior to the start of the lease.
- Lease payments made to the lessor result in:
- (DR) Reduction of the lease liability
- (DR) Recognition of interest expense – a non-operating expense
- (CR) Cash
- The lease asset is amortized over the shorter of the lease term or the useful life of the underlying asset:
- (DR) Amortization expense
- (CR) Lease asset accumulated depreciation
Governmental funds:
- At the start of the lease term, a lessee should recognize an expenditure and other financing source:
- (DR) Capital outlay expenditure – for the amount of the lease asset, plus any initial direct costs and lease payments made prior to the start of the lease, less any lease incentives.
- (CR) Other financing source – 391.7X amount equal to the lease liability
- (CR) Cash (possible entry) – for payment of any initial direct costs and lease payments made prior to the start of the lease.
- Lease payments made to the lessor result in:
- (DR) Debt service – principal
- (DR) Debt service – interest
- (CR) Cash
Lessor Accounting (GAAP)
Government-wide statements, governmental and proprietary funds:
- At the start of the lease term, a lessor should recognize a lease receivable and a deferred inflow of resources.
- (DR) Lease Receivable – Initially measured at the present value of lease payments expected to be received during the lease term.
- (DR) Cash (possible entry) – for any lease payments received prior to the start of the lease.
- (CR) Deferred Inflow – Measured as the sum of the initial measurement of the lease receivable – plus any lease payments received prior to the start of the lease, less any lease incentives.
- Lease payments received from the lessee result in:
- (DR) Cash
- (CR) Reduction of the lease receivable
- (CR) Recognition of interest income – a non-operating revenue. Use BARS 361.4X
- (DR) Reduction of the Deferred Inflow – in a systematic and rational manner
- (CR) Recognition of lease revenue –
All Governmental and Proprietary Funds: Use BARS 34X.XX (X = applicable function).
Proprietary funds only – use BARS 362 for non-operating leases.
Governmental funds only – use BARS 362 for leases not tied as specific operation/function or leases that are infrequent in nature.
- The lessor continues to report and, if applicable, depreciate the leased capital asset.
The following example is for a 60 month lease, with payments of $1,000 per month, at a discount rate of 3% (present value of total lease payments = $55,791):
Calculations above are based on summary amortization table (actual lease payments are made monthly):
GAAP Basis Lease Notes
The finalized GAAP BARS manual leases notes can be found using the links below. If there is any questions about these notes please submit a HelpDesk.
GAAP Note X – Leases (Lessors)
GAAP Note X – Leases (Lessees)
Cash Basis Accounting
The finalized Cash BARS manual leases section can be found in BARS Cash 3.4.1 Leases and Installment Purchases. If you have any questions on the updated BARS guidance, please submit a HelpDesk.
Lessee accounting and reporting requirements
- Lessees – Schedule 9 – add a lease liability for the total amount (not the present value) of the future lease payments.
- Lessees – Lease/rental payments use (BARS 591.XX) to reduce the lease liability.
Lessor accounting and reporting requirements
- Lessors – Use BARS 34X.XX (X = applicable function) for lease payments received if leasing is the primary operation of a fund.
- Lessors – Use BARS 362.00 for lease payments received that are not the primary operation of a fund or for leases that are infrequent in nature.
Cash Basis Lease Note
The finalized Cash BARS manual leases note can be found in BARS Cash Note X – Leases (Lessees). If you have any questions on the updated BARS guidance, please submit a HelpDesk.
Schedule 09 / Schedule of Liabilities Reporting
This guidance is for both Cash and GAAP BARS basis lessees. Lessors have no liabilities to report on the Schedule 09.
Existing leases
If your government has leases that were in effect prior to the year lease accounting is effective, then you should report a beginning balance on your Schedule 09 for those leases. For example if your government's fiscal year follows the calendar year, then you would report a beginning balance for any leases that existed prior to January 1, 2022.
GAAP governments – your beginning liability will be reported at the amount you calculate for the beginning liability for the implementation of GASB 87.
Cash governments – your beginning liability will be reported at the total amount of lease payments that were remaining as of January 1, 2022.
New Leases
Any leases that are entered into during the year (new leases) will be reported as an addition on the Schedule 09. For example if your government's fiscal year follows the calendar year, then any new leases entered into during 2022 would be reported as an addition on the Schedule 09.
GAAP governments – the addition will be the liability amount you calculate to add the lease to your financial statements.
Cash governments – the addition will be the total amount of future lease payments.
Reductions
Reductions should typically be the amount the lease liability is reduced by during the fiscal year.
GAAP governments – this will be the principal portion of lease payments made throughout the year.
Cash governments – this will be the amount of lease payments made throughout the year.
Remeasuring (Recalculating) the Lease Liability
Calculating the lease liability involves making some assumptions about the lease. In specific circumstances, the lease liability is required to be remeasured (recalculated). If the remeasurement causes the lease liability to increase, that should be reported as an addition. If the remeasurement caused the lease liability to decrease, that should be reported as a reduction. Additions and reductions should be reported separately. For example, if a lease remeasurement cause the lease liability to increase, that should be reported as an addition and any payments made on that lease would be reported as a separate reduction. The addition and reduction should not be netted.
GAAP governments – Review GASB 87 paragraph 25 for instances where the lessee is required to remeasure the lease liability.
Cash governments – The lease liability needs to be remeasured in the following circumstances:
- Change in lease term
- Change in likelihood of purchase option
- Change in estimated amounts for payments already included
- Contingency resolved for variable payments.
Example Schedule 09
GAAP Basis FAQ
How do I record the initial implementation entries in the GAAP Financial Statements?
Lessor – Full accrual statements and modified accrual statements
Record a lease receivable and deferred inflow for all old leases that were in effect prior to implementation date.
Lessee – Full accrual statements
Record a lease asset and lease liability for all old leases that were in effect prior to implementation date.
Lessee – Modified accrual statements
Nothing. Lease assets and lease liabilities are not recorded in modified accrual funds, so there is no journal entry to make for old leases. If you enter into any new leases during the year, you would record a capital outlay and other financing source.
How do I determine the discount rate if no interest rate is stated in the lease agreement?
The overall goal is to discount lease payments using the interest rate at which the transaction is made. It is often not stated in lease agreements. It may be the rate implicit in the lease. If the lease's implicit rate is not readily determinable, the lessee's estimated incremental borrowing rate should be used. This is the rate the lessee would be charged for borrowing the lease payment amounts during the lease term.
I used the lessee's incremental borrowing rate, and I ended up with negative amortization in the early years of a lengthy lease. Is this reasonable?
Negative amortization indicates that the discount rate used was too high. The determination of the discount rate is an area that may require significant professional judgment. Even when adhering to the general GASB guidance, you need to use a rate that is reasonable for the nature of the transaction. A rate that is too high, even if it is the lessee's incremental borrowing rate, is not reasonable and is not the rate implicit in the agreement. If the determined rate used results in negative amortization, it is recommended governments use a discount rate that will not result in negative amortization.
What if the lessee prepays the entire lease amount? What rate do we use to discount to the present value?
If a lease is prepaid, there is no “financing” and so the amount received by the lessor is already at the present value. The lessor amortizes the lease receivable and deferred inflow at the total amount of the monthly payments.
Is lease revenue operating or non-operating revenue?
Current guidance from GASB 34 implies that if leasing is an integral part of a fund's principle ongoing operations (example – a port), then principal portion of the lease revenue is operating revenue. GASB Implementation Guide 2021-1, Question 4.13 states that the associated interest revenue is not operating revenue and therefore should be reported as non-operating revenue.
Does recognition of the deferred inflow have to be on a straight-line basis? This results in differing balances for the Lease Receivable and the Deferred Inflow.
No. GASB 87 only states “in a systematic and rational manner over the term of the lease.” For example, the effective interest method is acceptable.
Do we have to include all those leases between the internal service funds and the other funds?
No. Inter-entity leases are not covered by GASB 87. Caution – Leases between a primary government and a discretely-presented component unit are covered by GASB 87. Leases between a primary government and a blended component unit are not covered by GASB 87. But when the blended component unit presents its own financial statements, then GASB 87 applies.
We present comparative statements. Do we have to restate that third year in the MD&A?
No.
We lease land to a farmer to grow crops. Is this excluded because living plants are a biological asset?
No. Although GASB 87 excludes leases of biological assets (e.g. timber, living plants and animals), the underlying asset being leased in this case is the land.
What if the lessor can substitute one underlying asset for another one during the agreement?
The right to use another entity's asset is distinct from the underlying asset itself. So, substitution of an essentially identical asset does not violate the definition of a lease.
Is an easement a lease?
Maybe. An easement is a lease if it meets the definition of a lease. A temporary easement meets the definition when it is for a specified period of time and is an exchange or exchange like transaction. A permanent easement does not meet the definition because it does not meet the period of time criterion.
We have a multi-year agreement to lease space from a school district, but only during the school year. Is this a lease subject to GASB 87?
Yes. The requirement that a contract be “for a period of time” does not require uninterrupted use of the underlying asset.
We're leasing equipment and the monthly payments include insurance premiums to insure the equipment. Should we account for the insurance premiums separately?
Yes. You should separate contracts into lease and non-lease components (and multiple leases in a contract if the underlying assets have different lease terms). You should allocate the contract price to multiple components of a lease by first using individual component prices as stated in the contract. If the contract does not include separate prices for individual components or if the stated prices appear unreasonable, you will need to use professional judgment to determine the best estimate for the allocation of the contract price to each component. If it is not practicable (note that inconvenient does not equal “not practicable”) to separate the components, then you should account for the contract as a single lease.
How does GASB 87 affect my calculation of net investment in capital assets?
Lessees should include lease assets (a type of intangible capital asset) and the related lease liabilities in the calculation of net investment in capital assets. For lessors, GASB 87 does not affect the calculation of net investment in capital assets.
Cash Basis FAQ
When does the government record lease revenue to the 34X.XX charges for services BARS code or to the 362.00 rents and leases BARS code?
If leasing is an integral part of a fund's principle ongoing operations (example – a port), then lease revenues are operating revenues of the government and would be coded to the appropriate 342.XX charge for services BARS code.
If leasing is not an integral part of the principal operations, then lease revenue would be coded to the 362.XX rents and leases BARS code.
Do we have to include all those leases between the internal service funds and the other funds?
No. Inter-fund leases (leases that are between the government's departments) are not subject to the reporting requirements.
Caution – Leases between a primary government and component units are subject to reporting since component units are not reported in the financial information of the primary government.
We lease land to a farmer to grow crops. Is this excluded because living plants are a biological asset?
No. Although leases of biological assets (e.g. timber, living plants and animals) are excluded, the underlying asset being leased is the land and therefore lease accounting would be required.
What if the lessor can substitute one underlying asset for another one during the agreement?
The right to use another entity's asset is distinct (separate) from the underlying asset itself. So, substitution of an essentially identical asset does not violate the definition of a lease.
Is an easement a lease?
Maybe. An easement is a lease if it meets the definition of a lease. A temporary easement meets the definition when it is for a specified period of time and is an exchange or exchange like transaction. A permanent easement does not meet the definition because it does not meet the period of time criterion.
We have a multi-year agreement to lease space from a school district, but only during the school year. Is this a lease subject to lease reporting?
Yes. The requirement that a contract be “for a period of time” does not require uninterrupted use of the underlying asset.
We're leasing equipment and the monthly payments include insurance premiums to insure the equipment. Should we account for the insurance premiums separately?
Yes. You should separate contracts into lease and non-lease components (and multiple leases in a contract if the underlying assets have different lease terms). You should allocate the contract price to multiple components of a lease by first using individual component prices as stated in the contract. If the contract does not include separate prices for individual components or if the stated prices appear unreasonable, you will need to use professional judgment to determine the best estimate for the allocation of the contract price to each component. If it is not practicable (note that inconvenient does not equal “not practicable”) to separate the components, then you should account for the contract as a single lease.
Are capital asset purchases through the LOCAL Program considered leases or installment sales?
Use of the LOCAL program financing is considered a debt issuance. This is different from leases and installment sales. In a debt issuance, the government is procuring financing before the capital asset purchase. The vendor that is providing the capital asset is paid upfront (usually by the bank or financer) and the title of the asset is transferred to the government at the beginning of the arrangement.
The accounting and reporting for a debt issuance is not changing. The government would report an inflow for the total amount of the debt issuance (BARS Code 391.P0.00) and a capital expenditure (BARS Code 594.PP.60) for the total purchase price of the capital asset. This entry is made even if the bank or financer pays the vendor directly. Then the government would report the debt on their Schedule 09 and use BARS code 591.PP.P0 to make the debt payments. See also BARS Section 3.4.11 Accounting for LOCAL Program Financing Activities.
In an installment sale, the government has not procured financing upfront. Instead they will be making payments directly to the vendor over the term of the agreement. There is no cash exchanged up front. The title to the asset transfers to the government at the end of the agreement. There is no entry made at the start of an installment purchase. The government adds the installment purchase liability to the Schedule 09 and then uses BARS Code 594.PP.70 to make payments.
Resources and Video:
GASB Literature
GASB Implementation Guide No, 2019-3, Leases
GASB Implementation Guide No. 2021-1, Implementation Guidance Update – 2021
GFOA Literature
GFOA Best Practices/Advisory – Accounting for Leases
Audit Connections
1/15/19 Article: Lease accounting changes are coming soon
Accounting Literature
8/1/2019 Journal of Accountancy Article: Lessee accounting for governments, an in-depth look
Implementation Resources
SAO's Best practices for implementing new GASB standards
SAO's Checklist for accounting standards changes
Video
The recorded trainings below will cover the changes to governmental lease accounting and reporting for both GAAP and Cash BARS basis governments.
GAAP Leases, as of August 2021 (SAO eLearning runs 53:51)
Cash Leases, as of August 2021 (SAO eLearning runs 56:45)
SAO Workgroup
SAO has established a local GASB 87 implementation workgroup to identify and provide resources for local governments and to identify and resolve implementation issues. If you have any questions or topics for discussion, please submit an SAO Help Desk.