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Published: May 3, 2022

Accounting and reporting guidance for leases and subscription-based information technology arrangements (SBITAs) are changing for school districts and charter schools. This is the case regardless of whether your method of accounting is cash or modified accrual.

Before this change, districts and charters used a somewhat subjective test to determine if a lease should be classified as “operating” or “capital.” Under the new guidance, all leases (with a few stated exceptions) are just leases, eliminating “operating” leases. The primary goal of the new accounting method is to increase comparability across governments; it also gives financial statement users better, more complete information by establishing a single model for lease accounting.

The new leases requirements were effective beginning September 1, 2021, so financial statements for the current school year should reflect them.

New SBITA requirements will be effective beginning September 1, 2022 and should show up on next year’s financial statements.

How to apply accounting requirements for leases—don’t wait

Although you likely won’t be preparing financial statements until later this fall, the new lease requirements are in effect for the current school year and affect the accounting for lease payments being made right now. The new requirements also apply retroactively, which means districts and charters will need to evaluate not just current leases but also those in place before the school year began and any new ones to come.

More details on the new lease guidance can be found in the Chapter 3 of the 2021-2022 Accounting Manual for Public School Districts. We strongly recommend you don’t wait until the end of the year to make these changes. The new requirements require a review of key contract provisions that affect the measurement of the lease. One key reminder: Just because the term “lease” is in an agreement, that doesn’t necessarily mean it’s a lease for accounting purposes (and be cautious before assuming that anything that doesn’t mention a lease is exempt). There are also a number of exceptions and exclusions to the new accounting requirements, including agreements that meet the short-term lease criteria. Chapter 3 of the schools accounting manual lists these exceptions and exclusions in detail.

Here are four things to do to ensure you’re ready for year-end reporting this fall and the subsequent audits:

  • Gain an understanding of the new requirements by reviewing Chapter 3 of the accounting manual and the leases resources available on the SAO website, and viewing the trainings WASBO offers its members.
  • Identify the leases subject to the new requirements and those contracts that can be excluded. This might require working with other departments that initiate contracts, such as the purchasing or facilities departments.
  • Document key provisions for each agreement: lease term, payment provisions, extensions and interest rate. If the interest rate is not explicit or implied, retain support for how you determined an allowable interest rate.
  • Districts that use modified accrual accounting must calculate the interest and principle portions of each lease for lease liabilities and receivables. Retain documentation for how you calculated these items.
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Categorized in: School districts Schools

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