Article

New GASB Leasing Standards Present Challenges for Municipalities

While full implementation of GASB 87 isn’t expected until June 30, 2021, the time for cities, towns and quasi-public agencies to begin preparing for these new standards is now.

Learn More
< Back to Insights
Insights  <  New GASB Leasing Standards Present Challenges for Municipalities

While full implementation of GASB 87 isn’t expected until June 30, 2021, the time for cities, towns and quasi-public agencies to begin preparing for these new standards is now.

A new Government Accounting Standards Board (GASB) leasing standard (known as GASB 87) could wind up having a significant impact on municipalities and their balance sheets, and while full implementation isn’t expected until June 30, 2021, the time for cities, towns and quasi-public agencies to begin preparing for these new standards is now.

The standard applies to any government entity that has operating leases, i.e. rent expense or rental income. Under the new GASB standard, the new lease reporting model requires these leases to be reported as financing transactions with the exception being any leases that are short term (less than one year).

Recording these leases as financing transactions means that the government will be recognizing a lease liability / receivable and an intangible lease asset / deferred inflow of resources as a lessee / lessor, respectively. Governments with restrictions in the form of bond covenants should take note, as this new reporting could impact compliance. The new reporting will also affect the government’s debt limit calculation.

Governments will need to consider changes to policies and procedures for tracking and reporting leases both as lessees and lessors.  This means better documentation of these transactions and better communication of any changes such as period changes, refinancing arrangements, impairment, changes in lease terms, etc. The government should put a process around communicating these potential changes to ensure they are properly captured into the reporting.

In order to prepare for implementation of this new standard, the government should inventory its operating leases, both as lessee and lessor. The government should consider materiality thresholds when creating this inventory. A good tip to ensure that all these arrangements are captured is to have the accounts payable clerk / revenue clerk be on the lookout for recurring monthly transactions that could be a rental payment or rental income. The government should appoint a project manager or a task force to ensure compliance with this standard. Once the initial inventory is complete, the next step is to analyze the attributes of each lease and perform the calculation. Purchase options, termination penalties, etc. will have to be factored into the calculation. If the leases are extremely complicated, the government should consider bringing in outside assistance.

This statement is required to be applied retroactively by restating financial statements for all prior periods presented. If the government does not issue comparative financial statements, the calculation will still have to be performed in order to arrive at beginning of year balances. To break it down into dates, a government will have to measure these amounts as of January 1, 2020, which is the beginning of the December 31, 2020 calendar year, or July 1, 2020, which is the beginning of the June 30, 2021 fiscal year. Financial statement disclosures will also need to be updated for this new standard.

This is going to require much additional work and effort on the part of these municipalities and government agencies; a large amount of information will need to be gathered, and the leases themselves can prove to be very complicated. The level of work, naturally, will depend on the number of operating leases each entity has and the complexity of the arrangement.

Continue the Conversation with Our Team
Get in touch with us.

Contact Us