WASHINGTON – State and local governments should treat all leases as financings for the right to use an underlying asset, the Government Accounting Standards Board said Wednesday.

The guidance, called Statement 87, provides one approach to all leases of tangible assets such an office building, fleet vehicles or heavy equipment.

It does not cover intangibles such as computer software or non-exchange transactions such as donated assets.

“The board’s new leasing guidance better aligns the accounting and financial reporting of these arrangements with their economic substance,” GASB Chairman David A. Vaudt said.

Vaught said the single model “is designed to result in greater transparency and usefulness for financial statement users.’’

“It also is meant to reduce complexity in application for preparers and auditors of governmental financial statements,” he said.

The Financial Accounting Standards Board, on the other hand, has two approaches. They treat leases as either operating leases or capital leases.

Kip Betz, spokesman for the Financial Accounting Foundation, said state and local leases will be treated as financings “with limited exceptions.’’

Among the exceptions are short-term leases of up of 12 months that have an option to extend, financed purchases, leases that are considered investments and certain regulated leases such as those made between municipal airports and air carriers.

GASB wants state and local governments to recognize both a lease liability and an intangible asset representing the lessee’s right to use the leased asset.

In addition, state and local governments are required to amortize the expense over the shorter term of the lease, report the interest expense of the lease liability and disclose a general description of the leasing arrangements, including the amount of future lease payments.


Sailboats docked in the DuSable Harbor in Chicago, Illinois, June 1, 2006. The Chicago Park District's 9 lakefront harbors are the nation’s largest municipal marina system. Photographer: Joe Tabacca/Bloomberg News.
Sailboats docked in the DuSable Harbor in Chicago, Illinois, June 1, 2006. The Chicago Park District's 9 lakefront harbors are the nation’s largest municipal marina system. Photographer: Joe Tabacca/Bloomberg News.

In cases where the state or local government is the owner of the asset such as a sports stadium, marina or retail space in a municipal airport, the lease must be reported in financial statements.

As the lease holder, the governmental unit should systematically recognize lease revenue over the term of the lease corresponding with the reduction of deferred inflow, interest revenue on the receivable and disclose a general description of the leasing arrangement.

The governmental unit also must recognize a lease receivable and a deferred inflow of resources.

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