Among other governmental accounting practices, the GASB 87 enhances the usefulness of financial reporting for government leases to ease the relay of information for financial statement users. Though the official date for implementing the GASB 87 has passed, you can use this guide to prepare your lease accounting practices for the next fiscal year.
Table of Contents
1. What is the GASB 87?
GASB 87 is an accounting statement issued by the Governmental Accounting Standards Board (GASB). The GASB 87 requires an entity to state all of its lease liabilities and assets exceeding twelve months. The financial statements must mention these assets and liabilities as liabilities and right-of-use assets. Similar to the documentation of capital leases, the GASB 87 has extended the number of leases you need to account for. Furthermore, a new rule has substituted the capital lease title and concept. It states that all leases must be recognized as funding for the right to use an asset. Apart from that, the GASB 87 has eliminated non-capitalized leases.
2. Who does the GASB apply to?
The GASB has outlined generally accepted accounting principles, or GAAPs, which must be accepted and followed by all US governments – state and local. Certain non-profit organizations may also be liable to apply for the GASB 87, as some municipal organizations like airports. Healthcare and educational institutes are other organizations and government agencies responsible for implementing the GASB. The state accountancy boards and the American Institute of Certified Public Accountants also recognize leasing practices of the GASB 87.
3. Notable Changes for lessees and lessors
Before using GASB 87 accounting software to implement the new guidelines, know the significant changes depending on your position as a lessee or lessor. Once you’re clear on the policies, hire a trusted accounting service to help you implement GASB 87 and other accounting practices. They can make the implementation process a breeze.
- Changes for lessees under the GASB 87
Among other significant changes is eradicating the operating or non-capitalized lease classification. Instead, all leases are finance leases under the GASB 87, apart from the short-term ones and those with transferability of ownership. Due to this change, companies’ financial statements may record a higher number of assets and liabilities leased. Furthermore, the GASB 87 demands reporting all lease-related expenses as amortization of the concerned assets and a decreasing interest expense depending on the reduction of payments for the liability.
- Changes for lessors under GASB 87
To implement the GASB 87, lessors must record receivable discounted rents. The receivable rent in question is for the entire duration of the lease. The discounted rate is calculated through the “appropriate interest factor” method. As a lessor, you must identify expected income and deferred revenue for every accounting period in your company or organization’s balance sheet. To simplify such calculations, adopt simple payment systems. However, some lease terms might become complex due to future rent calculations, increasing rent-related expenses over time.
4. Become aware of the new GASB 87 guidelines
To begin implementing the new GASB 87 guidelines, you must familiarize yourself with them. Go through the official GASB 87 document on the official website and pay attention to additions and other changes. Apart from the implementation guidelines, every possible resource you might need is available on the official GASB website.
5. Compile a lease inventory
To ensure proper documentation of your leases in compliance with the new lease standard, enlist all leases to avoid missing out on any. Give special attention to leases that are part of contracts relating to using an asset, also called the embedded leases. Embedded leases are sometimes finical to identify; therefore, making a list before the implementation is better.
Some governments have a decentralized process of entering and negotiating lease terms. Make sure to begin a contract of leases and evaluate the contractual agreements. Mainly you want to focus on reviewing the lease agreements and checking the financing agreements concerning the purchase loans or sales amounts. Please pay special attention to contracts with the government as a lessor and whether they have an interest rate and other components like start and end dates.
6. Put your inventory list in the GASB 87 software
The last step for GASB 87 implementation is to input data regarding previous leases within the GASB 87 accounting software. Using software removes errors in the identification of your leases, makes the journal entry and calculation process smooth and helps the transition to a revised lease standard easily.
Ensure you follow the above steps to apply new accounting practices for your business’s financial reporting. In addition, consider using a lease accounting program to reduce the time spent on accounting and the likelihood of human error while dealing with the intricate and ever-changing GASB statements.