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September 21, 2023
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GASB 87 Implementation Guide For Dummies With Examples

GASB 87 Implementation Guide For Dummies With Examples


GASB 87 Leases establishes a single model for lease accounting for all governmental entities.

Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources.

Navigating the intricacies of GASB 87 implementation can be a daunting task for organizations. In this comprehensive GASB 87 implementation guide, we provide expert insights, practical tips, and real-life examples to ensure a smooth and successful transition to GASB 87 compliance.

What is GASB 87?

GASB 87, or Statement No. 87, Leases, is a governmental accounting standard that establishes a single model for lease accounting by governments. The standard was issued by the Governmental Accounting Standards Board (GASB) in June 2017 and is effective for fiscal years beginning after December 15, 2021.

GASB 87 requires governments to recognize all leases as assets and liabilities on their balance sheets, regardless of whether the lease is classified as an operating lease or a capital lease under previous accounting standards. This change is intended to provide users of government financial statements with a more complete picture of a government’s financial position and obligations.

Under GASB 87, a lease is defined as an agreement that conveys the right to control the use of an asset for a period of time in exchange for consideration. The consideration may be in the form of payments of rent, a bargain purchase option, or other payments.

Governments that are subject to GASB 87 will need to assess their lease agreements to determine whether they meet the definition of a lease. If a lease does meet the definition, the government will need to recognize the lease asset and liability on its balance sheet. The lease asset will be measured at the present value of the lease payments, and the lease liability will be measured at the same amount.

GASB 87 also requires governments to amortize the leased asset over the lease term. Amortization is the process of allocating the cost of an asset over its useful life. The amount of amortization expense recognized each period will be based on the lease payments made during the period and the remaining balance of the lease liability.

The adoption of GASB 87 will have a significant impact on the financial statements of governments. Governments will need to restate their prior financial statements to reflect the new accounting requirements. In addition, governments will need to make changes to their internal controls and processes to ensure that they are in compliance with GASB 87.

The following are some of the key benefits of GASB 87:

  • Improved comparability of financial statements: GASB 87 will result in more comparable financial statements for governments that use the standard. This is because all leases will be accounted for in the same way, regardless of whether they are classified as operating leases or capital leases under previous accounting standards.
  • Improved transparency: GASB 87 will provide users of government financial statements with more transparency about a government’s leasing activities. This is because all leases will be recognized on the balance sheet, which will provide users with a better understanding of a government’s financial position and obligations.
  • Improved accountability: GASB 87 will improve accountability by requiring governments to recognize the full cost of their leasing activities. This will help to ensure that governments are making informed decisions about their leasing activities and that they are not using leases to hide liabilities from users of their financial statements.

GASB 87 Leases

GASB 87 Leases

GASB Leases establishes a single model for lease accounting for all governmental entities. Under this statement, a lessee is required to recognize a lease liability and an intangible right-to-use (ROU) asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources.

A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The consideration can be in the form of payments, a guarantee, or other rights or benefits.

The lease term is the period during which the lessee has a noncancelable right to use the asset. The lease term also includes any additional periods in which the lessee can renew the lease if it is reasonably certain that the lessee will exercise the renewal option.

The fair value of the leased asset is the price that would be paid for the asset in an arms-length transaction between unrelated parties.

The interest rate implicit in the lease is the rate that equates the present value of the lease payments to the fair value of the leased asset.

The lease liability is the present value of the lease payments. The ROU (right-to-use) asset is the difference between the fair value of the leased asset and the lease liability.

The lease receivable is the present value of the lease payments. The deferred inflow of resources is the difference between the fair value of the leased asset and the leased receivable.

The lessee is required to amortize the ROU asset over the lease term. The amortization expense is calculated as the straight-line method over the lease term.

The lessor is required to recognize interest revenue on the lease receivable over the lease term. The interest revenue is calculated as the effective interest method over the lease term.

GASB Statement No. 87 requires all governmental entities to apply the new lease accounting standards for all leases that commence on or after December 15, 2018. Leases that commenced before December 15, 2018, are grandfathered under the old lease accounting standards.

GASB Statement No. 87 is a significant change from the previous lease accounting standards. The new standards are designed to provide more transparent and accurate financial reporting for leases.

GASB 87 effective date

The effective date of GASB 87 is for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Earlier application is encouraged.

GASB 87, Leases, is a new accounting standard that changes the way governments account for leases. Under GASB 87, all leases, regardless of their classification, must be capitalized on the balance sheet. This means that governments will now have to record the assets and liabilities associated with their leases, which will provide users of financial statements with a more complete picture of their financial position.

The effective date of GASB 87 was originally December 15, 2019, but the GASB later issued Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance, which delayed the effective date by 18 months. This was done to give governments more time to prepare for the changes required by GASB 87.

If you have any questions about GASB 87, please consult with your accountant or auditor.

GASB 87 Implementation Guide

GASB 87 Implementation Guide

The scope of GASB 87 includes all leases of nonfinancial assets, except for:

  • Leases of intangible assets.
  • Leases of biological assets.
  • Leases of supply contracts.
  • Service concession arrangements.
  • Leases of certain types of assets are financed with conduit debt.

A lease is defined as a contract that conveys the right to control the use of an asset for a period of time in exchange for consideration. The consideration may be in the form of payments, a guarantee, or other rights or benefits.

Under GASB 87, a lease is classified as a finance lease if it meets one of the following criteria:

  • The lease transfers substantially all of the risks and rewards of ownership of the asset to the lessee.
  • The lease term is for at least 75 percent of the estimated economic life of the asset.
  • The present value of the lease payments at the beginning of the lease term is at least equal to 90 percent of the fair value of the asset.

If a lease is classified as a finance lease, the lessee is required to recognize a lease liability and an intangible right-to-use asset. The lease liability is measured at the present value of the lease payments. The intangible right-to-use asset is measured at the same amount.

The lessee is required to amortize the lease liability and the intangible right-to-use asset over the lease term. The amortization expense is calculated using the straight-line method.

The lessor is required to recognize a lease receivable and a deferred inflow of resources if the lease is classified as a finance lease. The lease receivable is measured at the present value of the lease payments. The deferred inflow of resources is measured at the same amount.

The lessor is required to recognize interest revenue on the lease receivable over the lease term. The interest revenue is calculated using the effective interest method.

GASB 87 examples

Here are some GASB 87 examples and how it is applied to lease accounting:

1. Lessor Accounting

A lessor leases a building to a lessee for 10 years. The lease payments are $10,000 per year, payable in advance. The fair value of the building is $100,000.

Under GASB 87, the lessor would recognize a lease receivable of $100,000 at the beginning of the lease term. The lessor would also recognize interest revenue on the lease receivable over the life of the lease.

2. Lessee Accounting

A lessee leases a copier from a lessor for 3 years. The lease payments are $250 per month, payable at the beginning of each month. The fair value of the copier is $8,000.

Under GASB 87, the lessee would recognize an initial lease liability of $8,000 at the beginning of the lease term. The lessee would also recognize depreciation on the leased asset over the life of the lease.

Here are some additional details about the lessee accounting:

  • The initial lease liability is measured at the present value of the lease payments. The present value is calculated using the lessee’s incremental borrowing rate.
  • The lessee amortizes the lease liability over the lease term using the effective interest method.
  • The lessee depreciates the leased asset over the lease term using a straight-line method.

3. Lease Incentives

Lease incentives are payments made by the lessor to the lessee in order to induce the lessee to enter into a lease agreement. Lease incentives can be in the form of cash payments, free rent, or other considerations.

Under GASB 87, lease incentives are recognized as revenue by the lessor over the lease term. The lessee reduces the initial lease liability by the amount of the lease incentive.

4. Lease Termination

If a lease is terminated before the end of the lease term, the lessee and lessor must adjust their respective accounting records. The lessee will recognize a gain or loss on the termination of the lease, and the lessor will recognize a loss on the termination of the lease.

The amount of the gain or loss is calculated as the difference between the carrying value of the lease asset or liability and the termination payments made by the lessee or received by the lessor.

GASB 87 Lease Examples

GASB 87 Lease Examples

Here are some GASB 87 lease examples and how it is applied in practice:

1: Lease of a copier

A government leases a copier for 3 years at a monthly rental of $250. The copier has a fair value of $8,000.

Under GASB 87, the government would recognize an initial lease liability of $7,390. This amount is calculated as the present value of the future lease payments, discounted at the implicit interest rate of the lease. The government would also recognize a leased asset of $7,390.

2: Lease of a building

A government leases a building for 10 years at an annual rent of $100,000. The building has a fair value of $1 million.

Under GASB 87, the government would recognize an initial lease liability of $925,926. This amount is calculated as the present value of the future lease payments, discounted at the implicit interest rate of the lease. The government would also recognize a leased asset of $925,926.

3: Lease with a bargain purchase option

A government leases a piece of equipment for 5 years at a monthly rental of $1,000. The lease includes a bargain purchase option that allows the government to purchase the equipment for $1 at the end of the lease term. The equipment has a fair value of $50,000.

Under GASB 87, the government would recognize an initial lease liability of $47,619. This amount is calculated as the present value of the future lease payments, discounted at the implicit interest rate of the lease, plus the present value of the expected bargain purchase price. The government would also recognize a leased asset of $47,619.

These are just a few examples of how GASB 87 is applied in practice. The specific accounting treatment will vary depending on the specific terms of the lease agreement.


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