GASB 87: Revolutionizing Lease Accounting For Governmental Organizations

Key Takeaways:

• GASB 87 transforms lease accounting for government entities by requiring the balance sheet to reflect all lease obligations, enhancing the transparency and accuracy of financial statements.

• Compliance Strategy: To ensure GASB 87 compliance, organizations must thoroughly understand the standard, accurately document and analyze all lease data, and integrate robust accounting software that can streamline and maintain the ongoing compliance process.

• NetLease: Netgain's accounting software, NetLease, offers a specialized suite of tools that align with GASB 87 standards, enabling automated lease compliance, efficient book closures, and a comprehensive financial management system.

GASB 87 marks a transformative era in lease accounting for governmental organizations, introducing standards that redefine the recognition and management of lease agreements. This new accounting standard compels a shift towards greater transparency and uniformity, ensuring that lease liabilities and assets are reflected more accurately on financial statements. 

From improved financial disclosures to the nuances of implementation, we'll guide you through the revolution that is reshaping the fiscal landscape of public sector accounting.

Elevate the precision and oversight of your financial operations with Netgain's suite of accounting applications. Our technology empowers your team to automate and refine complex tasks, from ensuring lease compliance to facilitating efficient book closings. Embrace the future of accounting with streamlined processes and enhanced control. Discover the difference with NetLease—connect with us to transform your financial management.

What Is GASB 87?

GASB 87, or Governmental Accounting Standards Board Statement 87, is a standard developed by the GASB that addresses lease accounting for governmental organizations. It establishes new guidelines for lease accounting, requiring lessees to recognize lease obligations on their financial statements.¹

GASB 87 aims to enhance the comparability and consistency of financial statements by ensuring all government leasing activities are accounted for.

How Does GASB 87 Work?

Under GASB 87, lessees record a lease liability and an intangible right-to-use asset on their balance sheets, effectively eliminating the distinction between operating and capital leases. Lease expenses are now recognized based on the amortization of the asset and interest on the lease liability, providing a more faithful representation of the leasing obligations. 

What Are The Key Provisions Of GASB 87?

GASB 87 introduces several key provisions that organizations need to adhere to:

• Recognition And Measurement: Lessees are required to recognize lease obligations as liabilities and right-of-use assets on their balance sheets. The lease liability represents the present value of all lease payments, while the right-of-use asset reflects the lessee's right to use the underlying asset.
• Classification Of Leases: Leases are categorized as either finance leases or operating leases. Finance leases involve the transfer of control over the underlying asset to the lessee, while operating leases do not. Different accounting treatments apply to each classification.
• Measurement Of Lease Receivables: Lessors are required to measure lease receivables using the effective interest rate method. This ensures that lease income is recognized over the lease term based on a constant periodic rate of return.
• Disclosures: GASB 87 mandates certain disclosures to provide transparency to financial statement users. This includes information on lease payments, lease terms, and significant leasing arrangements.

The Types Of Leases That Are Subject To GASB 87

GASB 87 applies to various types of leases within governmental organizations. Here are the types of leases that are subject to GASB 87:

Operating Leases

• Refers to lease agreements where the lessee is granted the right to use an underlying asset, such as equipment or office space, without the transfer of ownership. 
• Requires lessees to account for lease liabilities and right-of-use assets, thereby providing a more accurate representation of their financial obligations and assets.

Finance Leases

• Agreements that ultimately lead to the lessee gaining ownership of the underlying asset by the end of the lease term. 
• GASB 87 includes finance leases within its scope, meaning that governmental entities must recognize and account for these leases in their financial statements in accordance with the standard's guidelines.

Short-Term Leases

• Lease agreements with a maximum term of 12 months or less, and they do not grant the lessee an option to purchase the leased asset. 
• GASB 87 addresses these leases separately, with different recognition and measurement requirements compared to longer-term leases. 

Leases Of Non-Financial Assets

• GASB 87 primarily applies to leases involving non-financial assets, which can encompass a wide range of tangible items, such as real estate, vehicles, equipment, and other physical assets. 
• The standard's focus is on these types of leases and does not cover financial assets, financial instruments, or intangible assets, as they have distinct accounting standards.

Interfund Leases

• In cases where one fund within a governmental entity leases assets to another fund within the same entity, these intrafund leases are subject to GASB 87 if they meet the criteria defined by the standard for lease recognition. 

Leases Of Capital Assets

• Leases of assets that meet the criteria of capitalization, typically determined by materiality and financial thresholds, fall under the scope of GASB 87. 
• Such leases are recognized and accounted for in accordance with the standard, reflecting their significant financial impact and importance to the governmental organization's financial statements.

The Benefits Of GASB 87 

Implementing GASB 87 offers organizations a host of benefits that not only enhance financial transparency but also streamline accounting practices. Here are some of the advantages to be excited about when embracing GASB 87:

Improved Financial Reporting

By requiring leases to be recognized on the balance sheet, GASB 87 enhances the transparency and accuracy of financial reporting. This allows stakeholders to make more informed decisions based on reliable financial information.

Enhanced Accountability

With the inclusion of lease obligations on the balance sheet, governmental organizations are held more accountable for their financial commitments. This fosters better governance and responsible financial management.

Streamlined Compliance

GASB 87 provides a standardized approach to lease accounting, eliminating inconsistencies and ensuring compliance with accounting principles. This simplifies the lease accounting process for governmental organizations.

Better Decision-Making

Having a clear view of lease obligations facilitates better decision-making. Organizations can evaluate the financial impact of lease commitments and assess the feasibility of future leases more effectively.²

How Can Lease Accounting Software Help With GASB 87 Compliance?

Navigating GASB 87 compliance can be streamlined with the right lease accounting software. Here's how it can simplify the process for you:

• Automated Calculations: No more manual number-crunching. The software handles complex calculations like present value and lease classifications, reducing errors and saving precious time.
• Centralized Data: Keep all your lease information in one place. This means better organization and accuracy, with all your lease data neatly stored and easily accessible.
• Compliance-Ready Reporting: Generate reports that meet GASB 87 requirements with ease. This not only makes preparing financial statements simpler but also increases the transparency of your reporting to stakeholders.
• Workflow Efficiency: Say goodbye to the heavy lifting of lease management. The software streamlines your lease accounting tasks, freeing up your team to focus on more strategic activities.

NetLease stands out as a robust solution tailored to support your organization's adherence to GASB 87 standards. By integrating NetLease into your financial systems, you can navigate the complexities of lease accounting with an added layer of precision and ease. Contact us today and ensure that your compliance is not only met but sustained with confidence as regulations evolve.

How Can Organizations Ensure Their Compliance With GASB 87?

To ensure compliance with GASB 87, organizations should consider the following steps:

Awareness And Education

• Thoroughly educate staff and stakeholders about GASB 87 and its requirements.
• This ensures that everyone involved understands the standard and their roles in compliance.

Lease Identification And Documentation

• Identify all leases within the organization and ensure proper documentation.
• Maintain accurate records of lease agreements, terms, and relevant information.

Lease Data Collection And Analysis

• Gather necessary lease data, including lease terms, payments, and discounts rates.
• Perform calculations to determine the present value of lease payments and assess lease classifications.

System And Process Updates

• Review and update accounting systems and processes to accommodate the changes required by GASB 87.
• This includes modifying financial reporting procedures and integrating lease accounting software, if necessary.

Ongoing Monitoring And Reporting

• Regularly review lease agreements and related information to ensure ongoing compliance with GASB 87.
• Monitor lease payments, reassess lease classifications when necessary, and provide the required disclosures in financial statements.

Challenges Of Implementing GASB 87

When organizations embark on implementing GASB 87, they may encounter various challenges that can range from the complexity of the standard itself to operational and administrative issues³ including:

Data Collection And Analysis Complexity

Gathering lease data and performing calculations to meet the requirements of GASB 87 can be complex and time-consuming. Organizations need to ensure they have the necessary resources and expertise to handle this process effectively.

Operational Changes

Implementing GASB 87 may require operational changes within organizations. This includes updating accounting systems, training staff, and establishing new processes to comply with the standard.

Time And Resource Constraints

The transition to GASB 87 may require a significant investment of time and resources. Organizations should plan accordingly and allocate sufficient resources to ensure a smooth implementation.

Final Thoughts On GASB 87

GASB 87 marks a significant milestone in lease accounting for governmental organizations. The standard's provisions, which require the recognition of lease obligations on balance sheets, enhance transparency, accountability, and decision-making. By adhering to GASB 87, organizations can streamline their compliance efforts and provide accurate financial reporting to stakeholders.

At Netgain, we understand the challenges that come with implementing and managing lease accounting standards. That's why we develop innovative application solutions like Netlease, designed to simplify, standardize, and automate compliance, finance, and accounting processes. Our products emphasize controls, auditability, and efficiency, allowing organizations to navigate the complexities of GASB 87 and other regulatory requirements with ease.

Contact us today and take control of your lease accounting process. Unlock the full potential of your financial management capabilities with Netgain.

Frequently Asked Questions About GASB 87

Are there any transition provisions for GASB 87?

Yes, GASB 87 provides transition provisions to facilitate the implementation of the new standard. The transition provisions allow organizations to apply GASB 87 retrospectively or through a modified retrospective approach. It is important to carefully review the specific requirements outlined in the standard and determine the most appropriate transition method for your organization.

How should leases be classified under GASB 87?

Leases under GASB 87 should be classified as either finance leases or operating leases. The classification is based on the criteria provided in the standard. Finance leases involve the transfer of control over the underlying asset to the lessee, while operating leases do not. Organizations should carefully assess lease agreements against the criteria to determine their proper classification.

What is the initial measurement for a lease liability under GASB 87?

The initial measurement for a lease liability under GASB 87 is the present value of lease payments, discounted using the lessee's incremental borrowing rate at the lease commencement date. This includes consideration for both fixed and variable lease payments, as well as any lease incentives.

How should initial direct costs be accounted for under GASB 87?

Initial direct costs incurred by the lessee should be added to the initial measurement of the lease liability and recognized as an expense over the lease term. These costs include commissions, legal fees, and other costs directly attributable to obtaining the lease.

What is the subsequent measurement for a lease liability under GASB 87?

The subsequent measurement for a lease liability under GASB 87 involves reassessing and adjusting the lease liability over time. This includes recording interest expense, recognizing changes in lease payments, reassessing lease term assumptions, and updating the discount rate. The lease liability is reported at its carrying amount in the financial statements.

How should interest expenses be recognized under GASB 87?

Interest expenses for a lease liability under GASB 87 should be recognized over the lease term. This ensures that the expense is recognized on a systematic and rational basis over the duration of the lease. The effective interest method is used to calculate the interest expense, reflecting a constant periodic rate applied to the carrying amount of the lease liability.

What is the measurement of the right-of-use asset under GASB 87?

The right-of-use asset under GASB 87 is initially measured at the amount equal to the lease liability, adjusted for any lease payments made before or at the commencement date, as well as any initial direct costs incurred. The right-of-use asset is then subsequently measured at its carrying amount, net of accumulated amortization and impairment losses.

How should the right-of-use asset be depreciated under GASB 87?

The right-of-use asset should be depreciated over the shorter of the lease term or its useful life. The depreciation should be recognized on a systematic and rational basis, typically using the straight-line method. The depreciation expense should be recorded separately from interest expense in the financial statements.

Are there any exceptions or exemptions under GASB 87?

GASB 87 does not provide for specific exceptions or exemptions. However, organizations may need to consider the impact of other GASB pronouncements that may provide relief in certain circumstances. It is important to review and understand all relevant accounting standards and guidance to ensure comprehensive compliance.

How should the lease liability be presented in the financial statements under GASB 87?

The lease liability should be presented separately from other liabilities in the financial statements. It should be categorized based on its expected maturity or payment due dates, providing transparency and clarity to financial statement users.

Sources:

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• Did GASB 67 and 68 Impact Public Pension Risk Taking? - ProQuest. (n.d.). Www.proquest.com. Retrieved November 1, 2023, from https://www.proquest.com/openview/323834d21308f737958f42ffcf798ef9/1?pq-origsite=gscholar&cbl=18750&diss=y
• ROYBARK, H. M., COFFMAN, E. N., & PREVITS, G. J. (2012). The First Quarter Century of the GASB (1984-2009): A Perspective on Standard Setting (Part Two). Abacus, 48(2), 147–198. https://doi.org/10.1111/j.1467-6281.2012.00360.x