New GASB lease accounting standard: What airports need to know
Under GASB 87, many airport and aviation-related agreements may meet the definition of a lease. It's critical for airports to understand how the standard applies to their financial reporting and to take several early steps toward implementation.
A new Governmental Accounting Standards Board (GASB) standard, GASB Statement No. 87, Leases, was issued in June 2017, and airports will be impacted. The new standard revises the financial reporting for leases based on the foundational principle that leases are financings of the right to use an underlying asset. As a result, leases that were previously considered operating leases will, under this new standard, now be reported on the balance sheet as a lease receivable or a lease liability, with an offsetting deferred inflow of resources or intangible right to use the asset.
Since airports can be a party to hundreds of agreements — with airlines, concessionaires, ground transportation companies, and other entities — that meet the definition of a lease under GASB 87, it's important to understand how the standard applies to different types of aviation-related leases. In fact, GASB 87 includes some specific provisions that were included with the airport industry in mind.
What is a lease?
GASB 87 defines a lease as “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.” Some contracts may include a “lease component” that falls within the scope of the standard, among other terms and provisions.
What is the lease term?
The lease term is the period during which a lessee has a noncancellable right to use an underlying asset plus any periods where the lessee or the lessor have the sole option to extend or terminate the lease, but the lease is “reasonably certain” to continue.
The lease term excludes periods for which both the lessee and the lessor have a sole option to terminate the lease, even if it is not reasonably certain they will do so. Provisions that allow for termination of a lease due to (1) purchase of the underlying asset, (2) payment of all sums due, or (3) default on payments do not meet the definition of a “termination option” under the standard.
What is the exemption for certain regulated leases?
Instead of following the lessor accounting rules found in GASB 87, certain lessors may be able to recognize revenue based on the payment provisions of the contract. This exception is available to lessors whose leases are subject to certain external laws, regulations, or legal rulings that establish all of the following:
Lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator.
Lease rates should be similar for lessees that are similarly situated.
The lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided the lessee’s use of the facilities complies with generally accepted use restrictions.
The Federal Aviation Administration (FAA) has issued a policy statement governing all aeronautical uses of airports, and the statement sets forth, among other things, the three requirements listed above. As a result, all leases for aeronautical uses as defined by the FAA are exempt from recognizing a lease receivable and a deferred inflow of resources in their financial statements. Additionally, these exempt leases are not subject to the same disclosure requirements as nonexempt leases. Regulated leases, however, are subject to other disclosure requirements.
What is an aeronautical use?
The FAA is clear that federal law on the reasonableness of fees and other terms of airport access do not apply to non-aeronautical uses. According to the FAA, aeronautical users are “individuals or businesses providing services involving the operation of aircraft or flight support directly related to aircraft operation." Non-aeronautical use of the airport includes “aviation-related uses that do not need to be located on an airport, such as flight kitchens and airline reservation centers.” Non-aeronautical uses also include public parking, rental cars, ground transportation, and terminal concessions, such as food, beverage, and news and gift shops.
What disclosures are required for regulated leases?
For regulated leases, the GASB standard requires disclosure of a description of the agreements and the extent to which capital assets are subject to exclusive or preferential use by major asset class and by major counterparty. Additionally, airports are required to disclose revenues recognized under these agreements during the reporting period as well as expected future minimum payments from these agreements for each of the subsequent five years and in five-year increments thereafter. To the extent the airport has recognized variable revenue in excess of the minimum payments in the current reporting period, the disclosure of that amount is required.
Finally, if the lessor has issued debt secured by lease payments from agreements in which the lessee has the option to terminate the lease or abate lease payments, the airport must disclose the existence of these terms and conditions.
When does the new standard become effective?
The new standard is effective for periods beginning after Dec. 15, 2019. Retroactive application of the standard by restating all prior periods presented is required, to the extent this is feasible.
The new GASB standard will require significant accounting changes for airports. Don't wait to take these first steps toward implementation.
What steps can I take to prepare for implementation of the new standard?
There are several steps airports should take in preparation for a GASB 87 implementation:
1. Create a plan for gathering the data required to define which aspects of the standard apply to your agreements. This will likely involve multiple departments at your airport.
2. Once you've gathered a list of all leases, categorize them as either aeronautical or non-aeronautical.
3. Identify key items, such as the lease term, fixed versus variable payment provisions, cancellation options, and other key provisions.
4. Group the leases by similarities, and continue to work through the data necessary to properly account for the agreements and make any required disclosures.
The earlier you begin planning, the easier the transition will be.
As always, feel free to give our national airport team a call if you have any questions.