GASB Contemplating a New Approach for Leases
Do you engage in lease activities? If so, GASB is working to release a new lease accounting standard. GASB has proposed a single approach to lease reporting, which eliminates the operating and capital lease designations. Instead, lease accounting will be uniform, with a few exceptions. The following is an overview of GASB proposal:
The focus will be on the right to use an asset, meaning the lease contract conveys control of the right to use another entity’s nonfinancial asset (the underlying asset). Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Lessees would recognize a lease liability at the present value of future lease payments and a right-to-use asset, equal to the initial measurement of the lease liability, plus any payments made to the lessor at or before the beginning of the lease, and certain indirect costs. The lessee would amortize the lease asset over the lease term or the assets useful life, whichever is shorter. Future lease payments would be recorded as a reduction to the lease liability and interest expense.
Lessors would record a lease receivable at the present value of the payments to be received for the lease term and an offsetting deferred inflow of resources measured at the value of the lease receivable less any payments received at or prior to the beginning of the lease that relate to future periods. The lessor would continue to recognize the underlying asset. Future lease payments would be recorded as a reduction of the lease receivable and interest revenue. Lease revenue would also be recorded with a corresponding reduction to the deferred inflow of resources as future lease payments are received.
Note Disclosures and Other Topics
Lessees and lessors would include information about the terms of the lease arrangement and other information generally consistent with current disclosure requirements.
The proposal also addressed contracts with multiple components and contract combinations, lease terminations and modifications, subleases, and leaseback transactions.
Short-term leases are defined as those with a maximum term of 12 months or less, including any options to extend, regardless of its probability of being exercised. Lessees and lessors would recognize current outflows and inflows (e.g. lease expense and lease revenue) of short-term leases 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 should be accounted for as financed purchases.
The proposed guidance would not apply to leases for:
- Intangible assets (with limited exceptions)
- Biological assets (e.g. timber, living plants and living animals)
- Service concessions arrangements
- Assets financed through outside conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor
Effective Date and Transition
The GASB is currently re-deliberating its proposal and expects to issue a final standard in the second quarter of 2017. The final standard is anticipated to be effective for reporting periods beginning after December 15, 2018, with early adoption permitted. Governments would assess the facts and circumstances existing at the beginning of the implementation period and recognize and measure the leases accordingly. Lessors would not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases would become the carrying values of the underlying assets.