Puh-LEASE Be Prepared for GASB 87

Are you prepared for the new lease accounting standard for governments? Statement No. 87 (Leases) of the Governmental Accounting Standards Board (GASB) will require major changes in the way governments account for a variety of lease arrangements. It takes effect for reporting periods beginning after June 15, 2021. Governments that lease assets from others (lessees) will report liabilities for all of their leases of land, buildings, and equipment (except for short-term leases and contracts that transfer ownership). This includes leases that previously were considered operating leases and, therefore, were not reported as liabilities.

If you haven’t already taken these steps, you should start soon to make sure your entity is prepared to comply:

1. Start the conversation. Estimate the potential impact recording the lease asset and liability on the statement of financial position will have on key ratios, as well as items like debt limitations, bond covenants, grant agreements and your institution’s composite score. Start the conversation to restructure or revise covenants, as needed, to ensure continued compliance in future years.
2. Establish an implementation team. Consider the benefits of including staff outside of finance, such as procurement, legal or information technology.
3. Develop a timeline. The implementation team should devise a timeline for adoption. Can your entity utilize existing software to track and account for leases, or should a new software be purchased? This entails a cost/benefit analysis unique to your entity, based on the number of leases and available resources on hand.
4. Gather the information. Start gathering existing leases and make a spreadsheet of pertinent facts. Include terms (interest rate, payments) and start and end dates, including renewal options.
5. Develop policy statements to support the process. Develop accounting policy statements to outline the process for making judgments with a significant impact on measurement. For example, departments that initiate lease agreements may need to better document lease terms, options, and payment provisions, and communicate those factors to the finance department for proper lease reporting.
6. Set up a control system. Implement controls to identify leases and lease modifications. When there is a change in a lease term, estimated lease payment amounts, or other components of lease agreements, such information may need to be communicated to finance personnel in a timely manner because it may affect the amounts reported in the financial statements.
7. Consider your capitalization policy and its impact. Governments may consider changing their capitalization threshold for assets and/or the entity’s established guidelines for useful lives.
8. Make a plan for addressing complicated contracts with multiple components. Try to avoid headaches down the road that could result from undiscovered aspects of complex lease contracts.
9. Consider your chart of accounts and how departments currently record financing arrangements.
10. Don’t forget there are some exclusions. Under the new standard, the following are excluded: short-term leases, regulated leases, contracts that transfer ownership, supply contracts, the lease of an asset that is an investment, inventory, intangible assets, biological assets, assets financed with outstanding conduit debt, and service concession arrangements.

Many governments are opting to engage outside CPA firms to help them understand their current state and the scope of process changes that might be required to meet the new standard, as well as to develop a plan for how to get there. In fact, approached correctly, this required change can serve as a prime opportunity to gain a better understanding of overall financial commitments, and ultimately should improve financial reporting processes. Contact Weaver for help with the process.