September 6, 2017
Changes to Lease Accounting on the Horizon
If your government entity enters into lease agreements, know that the Governmental Accounting Standards Board (GASB) recently issued a new lease standard. Today’s operating and capital lease designations are replaced with a single, uniform lease accounting approach, with a few exceptions. The following is an overview of the standard:
The standard defines a lease “as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.”
The focus of the standard is on the lessee’s right to use an asset. Lessee’s will recognize a lease liability and a right-to-use asset, both at the present value of expected future lease payments, minus lessor incentives and ancillary charges to place the asset in service, plus payments made to the lessor at or before the commencement of the lease term (right-to-use asset only) and certain direct costs. The lessee will amortize the right-to-use asset over the shorter of the lease term or the useful life of the asset. Interest on the lease liability will be recognized as a current outflow.
Lessors will recognize a lease receivable and offsetting deferred inflow of resources, both at the present value of the expected lease payments during the lease term. The deferred inflow of resources will be adjusted for any payments received at or before the commencement of the lease term. The asset will continue to be recognized. The lessor will recognize interest revenue on the lease receivable and an inflow of resources (lease revenue) from the deferred inflows of resources over the lease term.
Note Disclosures and Other Topics
Lessees and lessors will disclose information about the terms of the lease arrangement and other information generally consistent with current disclosure requirements.
The standard addresses contracts with multiple components, subleases, lease terminations and modifications, sale-leasebacks, lease-leasebacks and intra-entity leases, and related party leases.
Government entities that entered short-term leases, which are defined as leases with a maximum term of 12 months or less, will recognize current outflows/inflows (e.g. lease expense and lease revenue) per the terms of the arrangement.
Leases that transfer ownership of the underlying asset at or before the end of the lease without a termination option will be accounted for as financed purchases.
The guidance does not apply to leases for intangible assets (with limited exceptions), biological assets (e.g. timber), service concessions arrangements, inventory, and assets financed through outside conduit debt.
Effective Date and Transition
The standard is effective for reporting periods beginning after December 15, 2019, and earlier application is encouraged. Government entities should recognize and measure their leases using the facts and circumstances that exist at the beginning of the period of implementation. However, the standard indicates, “lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases become the carrying values of the underlying assets.”