The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases (GASB 87) in 2017 and subsequently postponed the implementation with Statement No. 95 in 2020. So, while it may seem like we have been talking about the “new” lease accounting standard for years, the reality is governments are required to adopt the accounting and reporting outlined in this statement beginning with financial periods ending June 30, 2022.
Unlike some standards, implementing GASB 87 will take research and evaluation prior to completing the year-end calculations required to ensure that the financial statements and footnote disclosures are complete and accurate. The statement provides an updated definition of a lease as follows:
It is important to note that while the title of the standard is Leases, it may include contracts that do not identify the agreement as a “lease.” This means that governments need to evaluate contracts beyond those referred to as a lease in evaluating the implementation of this standard. Note also that GASB 87 applies to both a government’s lessee and lessor activities.
The first step in the overall GASB 87 implementation process is identification of contracts that meet the definition of a lease. We recommend taking the following steps:
Once you have compiled the list of agreements that qualify as leases under GASB 87, you should determine the most efficient way to:
Depending upon how many leases your organization has and how complex the contracts are, this may be accomplished with a spreadsheet. Alternatively, these tasks may require specialized lease accounting software. If you think your organization will require software, allow time in the implementation process for evaluating software providers, data extraction and input and report development and testing.
We recommend that you engage with your auditor along the way to avoid surprises at year-end about the information the auditor requires, lease classifications and support for financial reporting, including the new footnote disclosures.
The following questions are intended to assist a governmental entity in identifying potential leases that you may have. It is not intended to be all inclusive.
Please note that per GASB 87, the contract does not need to be for uninterrupted use and the implementation guide clarifies that agreements for specific days or months can meet the definition of a lease.
Once a comprehensive list of potential leases is created, they can be evaluated to determine if any meet the exceptions identified in GASB 87 and thus do not require accounting and reporting as leases.
If you have questions about implementing GASB 87, or to learn how Baker Tilly’s government accounting specialist can help your organization, contact our team.