GASB 87, issued by the Governmental Accounting Standards Board (GASB), marks a significant shift in lease accounting for government entities. This standard, which took effect in June 2021, brings substantial changes to how leases are recognized, measured, and reported in financial statements. The primary objective of GASB 87 is to increase transparency and comparability across governmental entities by establishing a single model for lease accounting. This model treats most lease contracts as financing for the right to use an underlying asset.
Understanding GASB 87 is crucial for governmental entities, auditors, and accounting professionals. Its implementation affects a wide range of contracts and requires a detailed analysis of lease agreements. By transitioning to this new standard, organizations can achieve a more accurate representation of their financial obligations and assets, thereby providing clearer insights to stakeholders and enhancing financial decision-making processes.
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What Is GASB 87?
GASB 87 is a lease accounting standard issued by the Governmental Accounting Standards Board that fundamentally changes how public sector entities record lease agreements in their financial statements. Designed to enhance transparency and comparability across financial reporting, GASB 87 mandates that entities recognize most leases as finance leases, requiring the reporting of lease liabilities and related right-of-use assets on the balance sheet.
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Key Requirements of GASB 87 for Organizations
GASB 87 establishes a new framework for lease accounting, requiring organizations to recognize most leases as lease liabilities and corresponding lease assets on their balance sheets. This shift impacts how governmental entities record and report their leasing activities. The key requirements of GASB 87 can be summarized as follows:
Lease Identification
GASB 87 mandates that a contract must be identified as a lease if it conveys control of the right to use another entity's non-financial asset for a period in exchange for consideration. This definition broadens the scope of what constitutes a lease, encompassing agreements that may not have been classified as leases under previous standards.
Lease Recognition and Measurement
Upon lease commencement, lessees must recognize a lease liability and an intangible asset representing the right to use the leased asset. The lease liability is measured at the present value of lease payments, while the lease asset is measured based on the lease liability, adjusted for any prepayments, incentives received, and initial direct costs.
Disclosure Requirements
GASB 87 requires detailed disclosures in financial statements, including information about the amount, timing, and uncertainty of cash flows arising from leases. Organizations must disclose the nature of their leasing arrangements, significant terms and conditions, and the total amount of lease assets and liabilities.
Transition Provisions
For implementing GASB 87, organizations are required to recognize and measure leases existing at or entered into after the beginning of the earliest period presented in their financial statements.
Step-by-Step Guide to Implementing GASB 87
Implementing GASB 87 requires a methodical approach to ensure compliance and accuracy in financial reporting. Here’s a step-by-step guide to help organizations navigate this process:
Inventory of Lease Agreements
Begin by compiling a comprehensive inventory of all lease contracts. This includes examining contracts beyond traditional lease agreements to identify any arrangement that meets the GASB 87 definition of a lease.
Review and Classification of Leases
Analyze each lease to determine whether it is a short-term lease, which is exempt from GASB 87, or a long-term lease that requires recognition on the balance sheet. This classification is crucial for the correct application of the standard.
Calculation of Lease Liabilities and Assets
For each lease that falls under GASB 87, calculate the lease liability as the present value of future lease payments. Concurrently, determine the lease asset value, which typically includes the lease liability amount, prepayments, and any initial direct costs.
Implementation of Lease Accounting Software
Consider adopting specialized lease accounting software, like NetLease, which is designed to streamline and enhance the management and reporting of lease data. This innovative solution automates complex calculations, ensuring compliance with standards like ASC 842, IFRS 16, and GASB 87. It offers features such as right-of-use asset adjustments, amortization schedules, and audit-ready reporting, enhancing decision-making visibility. NetLease also incorporates automation for lease abstraction, simplifying data entry and scaling to business needs. Furthermore, it supports the entire lease lifecycle, from initiation to termination, with powerful reporting capabilities and easy setup, making it an invaluable tool for organizations aiming to maintain accurate and compliant lease accounting.
Training and Policy Development
To ensure effective financial reporting and lease management under GASB 87, it's crucial to train staff comprehensively. NetLease simplifies this process by removing much of the guesswork associated with lease accounting. Its intuitive design and automated features make it easier to understand and adhere to the complexities of lease accounting standards. By incorporating NetLease into training programs, organizations can efficiently update internal policies and procedures, ensuring a smoother transition to compliance with GASB 87, while also enhancing staff proficiency in managing these critical financial operations.
Ongoing Monitoring and Review
Establish a process for regular review and monitoring of leases. This includes keeping track of lease modifications, reassessments, and terminations, as well as preparing for any future changes to lease accounting standards.
Tools and Software Solutions for GASB 87 Compliance
To efficiently manage the complexities of GASB 87, leveraging the right tools and software solutions is essential. These solutions not only simplify compliance but also streamline lease accounting processes. Here are key types of tools and software that can assist organizations:
Lease Accounting Software
Specialized lease accounting software is designed to handle the specific requirements of GASB 87. Features often include automated calculations of lease liabilities and assets, lease classification tests, and generation of disclosure reports. This software can integrate with existing financial systems, ensuring seamless data flow and reporting.
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Document Management Systems
Efficient organization and management of lease documents are crucial. Document management systems enable easy storage, retrieval, and tracking of lease agreements and amendments. Advanced systems offer indexing and search capabilities, making it simpler to locate specific lease terms or conditions.
Financial Analysis and Reporting Tools
Tools that offer financial analysis and reporting capabilities are invaluable. They assist in the accurate representation of lease liabilities and assets on balance sheets and income statements. These tools can also generate insights into the financial impact of leases, aiding in strategic decision-making.
Compliance Tracking Solutions
To maintain ongoing compliance, organizations can utilize compliance tracking solutions. These systems help monitor lease terms, ensure timely payments and reporting, and alert users to upcoming renewals or terminations.
Training and Support Resources
Beyond software, access to training and support resources is vital for successful GASB 87 implementation. Providers often offer educational materials, webinars, and customer support to assist users in navigating the complexities of lease accounting under the new standard.
Best Practices for Maintaining Compliance with GASB 87
Adhering to GASB 87 is not just about initial implementation; it requires ongoing diligence and best practices to maintain compliance. Here are key strategies organizations should adopt:
Continuous Education and Training
Keep accounting and finance teams informed about GASB 87 updates and nuances. Regular training sessions can ensure that staff members stay abreast of the latest lease accounting principles and practices.
Regular Review of Lease Agreements
Conduct periodic reviews of all lease agreements to ensure they are accurately reflected in financial statements. This includes monitoring for modifications, reassessments, or terminations that may affect lease accounting.
Implement Internal Controls
Establish robust internal controls around lease accounting. This includes procedures for lease data entry, calculations, and reporting to prevent errors and ensure consistency in applying GASB 87 standards.
Leverage Technology Efficiently
Utilize lease accounting software to its full potential. Ensure that it's regularly updated and that its features are being used effectively to track, manage, and report lease data.
Proactive Planning for Renewals and Expirations
Stay ahead of lease renewals and expirations. Proactive planning can prevent lapses in lease documentation and accounting, helping to maintain continuous compliance.
Engage with Auditors and Advisors
Maintain open lines of communication with external auditors and advisors. Their insights can be invaluable in ensuring that your organization's approach to lease accounting aligns with GASB 87 requirements.
Document Policies and Procedures
Clearly document policies and procedures related to lease accounting. This not only aids in training new staff but also serves as a reference point to ensure consistent application of the standard across the organization.
Final Thoughts
The implementation of GASB 87 represents a significant change in lease accounting for governmental entities. While it introduces new complexities, it also offers an opportunity for organizations to improve the transparency and accuracy of their financial reporting. By understanding the key requirements, following a structured implementation guide, utilizing the right tools and software, and adhering to best practices, organizations can successfully navigate the challenges posed by this new standard.
Effective GASB 87 implementation not only ensures compliance but also streamlines work processes, enhancing the efficiency and reliability of financial data. Organizations that proactively manage their lease portfolios and stay informed about ongoing changes in lease accounting standards are better positioned to make informed decisions and maintain financial integrity.
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Frequently Asked Questions
When did GASB 87 become effective?
GASB 87 became effective for reporting periods beginning after June 15, 2021.
Does GASB 87 apply to both lessees and lessors?
Yes, GASB 87 applies to both lessees and lessors, but with different reporting requirements.
Are there exemptions in GASB 87 for certain types of leases?
Short-term leases, defined as leases with a maximum possible term under 12 months, are exempt from GASB 87.
How does GASB 87 impact lease liability calculation?
Lease liability under GASB 87 is calculated as the present value of future lease payments, fundamentally changing how lease obligations are reported.
Can existing lease accounting software be used for GASB 87 compliance?
Many existing software solutions have been updated for GASB 87, but it's important to verify specific GASB 87 compliance capabilities.
What are the key disclosure requirements under GASB 87?
Key disclosures include details on the amount, timing, and uncertainty of cash flows from leases and information on the nature and terms of leasing arrangements.
How should lease modifications be handled under GASB 87?
Lease modifications should be reviewed for potential reclassification and remeasurement as per GASB 87 guidelines.
What training is recommended for GASB 87 implementation?
Training should focus on understanding the new lease accounting standard, its application, and how to use relevant software tools.
Are there specific challenges in implementing GASB 87 for small entities?
Small entities might face challenges due to limited resources but can overcome these by leveraging efficient software solutions and targeted training.
