We're out of time: Significant changes to your accounting process and financial statements are here.
After two years of delays and a completely changed world environment, GASB 87 – Leases, is set to become effective for fiscal years ending on or after June 30, 2022. If you recall, GASB 87 is a major change in how we account for lease agreements. The purpose of this article is to provide a basic understanding of the new pronouncement and to identify the key points to consider in preparations for its implementation. The basic objective of the statement is to quantify and present the full value of the lease on the statement of net position.
Currently, if you are in contract with a vendor for a lease it is generally accounted for as an expense during the period you pay for the lease. With GASB 87’s implementation, however, the lease will be a liability for the full life of the lease to be amortized over that lease period. The same is true if you are leasing to another entity the right to use a tribal asset. In that case, a receivable will be created for the life of the lease and amortized over the lease period. With either scenario the result is an increase in assets or liabilities on your statement of net position that wasn’t presented previously.
The general concept is not too complicated, however, the implementation of GASB 87 will require a bit of legwork and analysis. Additionally, depending on your financial environment and level of staff, the maintenance of accounting for leases under this new method could be difficult to keep up with. This should be a challenge to consider when determining the best way to implement and maintain. If there are several leases in the tribe’s portfolio, I would recommend reaching out to a consultant for assistance in setting up your lease accounting and maintenance policies. Additionally, there are several software applications in the market that could assist in both the setup and maintenance.
First Things First
One of the first things to do is to get copies of all existing lease agreements, both as the lessee (with a vendor) and as the lessor (recipient of the payments). Each agreement needs to be analyzed for these key points.
- Lease term
- Transfer of ownership
- Type of asset
Second: Understand the Term
GASB 87 only applies to leases with a term longer than one year. Unfortunately, determining the lease term is a little more complicated than looking at the end date of the lease. Start with the lease’s noncancelable period, then add any extension options that are reasonably certain of being exercised. If there is an option for either party to terminate the lease but it is reasonably certain to not be exercised, then that period of time should be added to the term.
Example:
The tribe leases a building for a five-year term; however, the tribe has an option to extend for another five years. If it is reasonably expected that the option will be taken, then the lease term would be 10 years.
Other factors to consider for defining the lease term are cancelable periods, where each party has the option to terminate the lease, or both must agree to extend. An example of the cancelable period would be a rolling month-to-month lease.
If the lease transfers ownership at the end of the term and does not contain a termination option, then the lease should be accounted for as a finance purchase instead of a lease.
Third: Consider the Type of Asset
The third key point to consider is the type of asset. There are exclusions for leased assets such as inventory items, service concession arrangements and supply contracts. Supply contracts do not convey control of the underlying asset, they are only providing a product of that asset to the lease. Other exclusions for lease treatment based on type of asset include assets that are either intangible or biological. Intangible assets such as mineral rights or software are excluded from this treatment unless there is a sublease of intangible right-to-use asset. Biological assets, such as timber, living plants or living animals, are also excluded from GASB 87 Treatment.
Additional Guidance
For more guidance on the implementation of GASB 87 please refer to GASB Implementation Guide No. 2019-3, Leases. It can be found on www.gasb.org.
Let’s look at an example of what the accounting entries will look like once the eligible leases are finalized.
The tribe has a copier lease agreement with a term of 4 years. There is an option to extend the term by another year. However, the tribe is not expected to elect that option. Therefore, the lease term will be 4 year (48 months). The lease agreement calls for a payment schedule of a monthly payment of $125 at 5% interest.
Payment Schedule
Government Fund
Capital Outlay 5,427.87
Other financing sources – lease proceeds 5,427.87
Government-Wide Fund
Other financing sources – lease proceeds 5,427.87
Lease liability – due within one year 1,356.97
Lease liability – due beyond one year 4,070.90
Intangible lease asset – equipment 5,427.87
Capital outlay 5,427.87
With each payment the Governmental Fund will record the cash disbursement and the principal expenditure and interest expense, and, in the Government-wide fund, the lease liability will be reduced along with the amortization expense being recorded. For the first year, this is what the entries would look like.
Government Fund
Lease principal payment expenditure 1,257.16
Interest expense 242.84
Cash 1,500.00
Government-Wide Fund
Lease liability – due within one year 1,257.16
Lease principal payment expenditure 1,257.16
Amortization expense 1,356.97
Accumulated amortization 1,356.97
As you can see from this brief discussion, GASB 87 can be a significant change to your accounting processes as well as the financial statements. It is important to get started on evaluating your leases now, because, ready or not, the time has come for implementation.
Scott Huebert
CPA, Partner, Finley & Cook
Scotth@finley-cook.com
Mr. Huebert as dedicated more than 20 years to the firm, becoming a Partner in 2016. He specializes in Native American Government, Fund Accounting, and oversees the firm’s Business System Consulting operations. Scott is a graduate of Oklahoma Baptist University and has been a Certified Public Accountant since 1999.
Scott is a member of the OSCPA and the AICPA, a 40 Under 40 Trail Blazer award winner, and is a continuing teaching advisor at the Oklahoma Tribal Finance Consortium; the Oklahoma State University Introductory Tribal Finance and Accounting Program; the National American Indian Housing Council.
He will be teaching a class on GASB 87 at the following 2022 Conferences:
OTFC Spring Conference in Tulsa, OK and at NAFOA 40th Annual Conference in Seattle, WA
Scott will also participate in a panel discussion at NAFOA on Fund Accounting Software
