How to implement GASB 87 for leases
Contracts that local governments enter into with vendors for IT services will soon be covered by the GASB 87 standard for lease accounting.
The Governmental Accounting Standards Board plans to release on its website as soon as next week a proposed accounting standard for “subscription-based information technology agreements” or SBITA under what will become Statement 96.
David Bean, director of research and technical activities for GASB, announced Wednesday that the GASB board approved the proposed standard a day earlier.
Bean made the announcement during a live web-based video presentation on GASB 87 sponsored by the Government Finance Officers Association that offered practical tips on how to implement the new standard.
GASB’s overhaul of what constitutes a lease and what doesn’t constitute one has been in the works for several years.
Recently, GASB announced that the requirement for the use of GASB 87 standard for lease accounting has been pushed back to fiscal years beginning June 15, 2021, because of the coronavirus pandemic.
The delay appears to have been warranted.
An instantaneous poll found only 4% of more than 750 online GFOA seminar participants have implemented GASB 87.
The poll showed 44% have begun pulling contracts to review. Thirty percent have read through GASB 87 while 22% haven’t yet started to prepare for the new GAAP standard.
Bean advised the finance officers that implementing GASB 87 may violate a local government’s existing bond covenants and debt limits. He suggested that they should conduct a Lexis Nexis database search of state statutes for possible violations and flag that issue to other local officials.
“What we have seen in practice is things that are called leases may not be a lease,” said Bean. “Things that are not called leases, actually meet the definition of a lease. So those are things that you need to consider in developing your policies.”
The new standard also eliminates the distinction between a capital lease and an operating lease.
“One thing that we have learned from the implementation of the new lease standards in the private sector is that the handle that people thought they had on operating leases wasn't as strong as they thought it was,” Bean said.
An easement, for instance, can be a lease. But a perpetual easement does not cover a finite period of time and is therefore not a lease.
Likewise, a one-dollar lease is not an exchange-like transaction and does not meet the definition of a lease.
Other exclusions listed by Bean included intangible assets such as mineral rights and copyrights; supply contracts; and biological assets such as timber, living plants and the animals in a zoo such as pandas on loan from China.
Tracie McCreary, chief project manager for the local government services section of the Ohio Auditor of State, summarized her experience implementing GASB 87 for one of the smaller cities in her state.
Her department started by looking at the city’s prior year’s financial statements and using an Excel spreadsheet to summarize the information they found, including the type of lease and whether it met the GASB 87 standard.
Common leases involve buildings, vehicles, lands such as parks or farmland, equipment, and easements, she said.
“It's not really the name ‘lease’ that you're looking for,” said McCreary. “It's more of what is the substance of that agreement that you want to look for.”
The noncancelable lease of farmland by an airport was considered a lease. Also meeting the GASB definition was the lease of softball fields to a youth league.
However, a monthly car payment agreement with a dealership for rotating vehicles on a 60-day to a 90-day basis for undercover police work did not meet the GASB definition of a lease.