GFOA approves draft guidance on GASB 87 compliance
ST. LOUIS – State and municipal government officials can expect to receive a checklist from the Government Finance Officers Association this September on how to compile a master list of their leases.
The expected GFOA guidance will come as governmental units prepare to meet a Jan. 1, 2020 deadline set by the Government Accounting Standards Board for treating all leases as financings for the right to use an underlying asset.
Municipal finance officers who are meeting here at GFOA’s annual meeting agree that the coming fiscal year – which for many starts July 1 – will be crunch time for them to prepare for the deadline, although early work already had begun.
“Fiscal ’19 will be when we do a lot of the work,” said Laura Lockwood-McCall, director of debt management for the Oregon State Treasury. “We don’t think it’s a problem but we don’t know yet.”
GFOA’s Standing Committee on Accounting, Auditing and Financial Reporting approved a draft document Saturday with 10 areas of advice for compliance.
The draft guidance is expected to be posted on GFOA’s website after it is approved in September by the executive board.
The checklist includes the administrative departments that should be consulted with in compiling a master list of leases.
“If your governing board is required to approve all leases, then reviewing past board reports may prove beneficial,” the draft advises.
The new standard is contained in GASB Statement 87, which involves the treatment of all leases as financings for the right to use an underlying asset.
GASB Statement 87 provides one approach to all leases of tangible assets ranging from buildings to fleet vehicles and laptop computers.
GASB Chairman David Vaudt announced the proposal in June 2017, saying at the time it “better aligns the accounting and financial reporting of these arrangements with their economic substance.”
Vaudt said the new standard “is meant to reduce complexity in application for preparers and auditors of governmental financial statements.”
Finance officers will need to asses all leases or contracts that are 12 months or longer, according to GFOA.
“It includes any renew periods they might have, regardless of who’s option it is to renew as long as it’s reasonably certain it will be renewed,” said Peg Hartnett, senior manager of GFOA.
“They need to review the current lease contracts to make sure they comply, and other contracts they have in place that were not recorded as a leases under the old guidance but now will have to be recorded as a lease under the new guidance,” Hartnett said.
The leases “will be reported as an intangible asset on their financial statements and then an offsetting lease liability,” Hartnett said. “So it affects their financial statements and it could affect their debt ratios so they need to be talking to their bond counsel about those things as well.”
Shorter term leases will continue to be treated as an expense for that period.
Melinda Gildart, controller for Chicago Public Schools, said her school district has done “very, very preliminary” work on addressing the new GASB standard.
The challenge, according to Gildart, is gathering the information and consolidating it in one place.”
For instance, the Chicago district has a master contract with Dell for laptop computers, but each of the more than 500 schools is responsible for payment and setting the length of the lease.
Chicago Public Schools also leases some of its buildings and has signed leases for other buildings that it occupies.
Tim Ewell, chief assistant county administrator for Contra Costa County, Calif., said his county’s current comprehensive annual financial statement already mentions GASB 87, but the bulk of the work on compliance will be in the new fiscal year starting July 1.
“We already break out capital leases,” Ewell said. “I don’t think it will be extremely difficult. The difficulty comes in a year one implementation to ensure you are doing it correctly.”
That difficulty will be obtaining information from 20 different county departments ranging from the sheriff to the district attorney, the Department of Weights and Measures, the county hospital and 10 medical clinics.
When it’s all done, there will be an upside, Ewell said.
“What is beneficial about GASB 87 is that we will have one definition of a lease,” he said.