Two years from now, the first governmental entities will be reporting leases in accordance with GASB Statement No. 87 (which is first effective for Dec. 31, 2020, year ends). While two years may seem like a long time, the time and effort needed to prepare for implementation will be significant for many entities. For that reason, we’ve identified the following four-step process to follow for successful implementation between now and the end of 2020.
Step 1: Assess the impact: Identify the population of leases
The first step in evaluating the future impact of this new standard is to identify all of your entity’s leases. Remember, this will apply to both lessee and lessor arrangements.
While all significant lessee agreements should already be disclosed in the financial statements, use this opportunity to make sure this is really the case.
We recommend taking several actions in order to identify all applicable agreements. In addition to reviewing the current financial statement disclosures, you might want to search board/council minutes, reach out to department heads and management, and scan cash disbursements. When you’re doing this, identify all potential lease arrangements, even if the agreement isn’t called a “lease.” Keep in mind that not everything labeled a lease will meet the GASB 87 definition, whereas, other arrangements not referred to as leases will. The GASB defines a lease as “a contract that conveys control of the right to use another entity’s nonfinancial assets (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.”
Don’t underestimate the effort required to identify your potential lease arrangements. For many organizations, this process could require a significant investment of your people’s time. Plan accordingly.
Step 2: Gather the data
Once you’ve identified the population of leases, the next step is to accumulate the necessary information. The best source will be the lease agreement, but depending on how long ago it was executed, it may take time to locate. Additionally, there could be subsequent extensions, amendments, or supplemental schedules to the agreements. Key pieces of information to pull out of the agreements include: the lease term, whether there are any options to extend or terminate, payment terms, any other components to the agreement (such as a service or maintenance portion), and the discount rate, if stated.
Step 3: Seek additional resources
We encourage you to seek additional information, education, and resources over the next two years. If you haven’t read Statement GASB 87, we encourage you to read it in its entirety as there are many nuances to the standard. In addition, watch for the GASB to release implementation guides on this new standard to clarify key topics.
Step 4: Prepare for implementation
As your entity’s implementation date nears, the time will come to formulate journal entries and footnote disclosures. Here’s where your work in steps 2 and 3 will pay off. First, perform a final verification that all of the agreements meet the GASB 87 definition of a lease. Then, calculate the present value of future lease payments. Lessees will record a lease liability for the future payments and a lease asset for the right to use the underlying asset. Lessors will record a lease receivable and deferred inflow of resources.
Have questions? Don’t hesitate to reach out to us! We’re here to help.