Are We There Yet? Implementing GASB 87 for existing lease contracts.

• Author: Levine, Michele Mark
• Position: ACCOUNTING

Sometimes anticipation is the worst part of a dreaded event, and perhaps this will be the case with the implementation of the Governmental Accounting Standards Board Statement No. 87, Leases (GASB 87). GASB 87 is first due to be implemented by governments for their earliest fiscal years beginning after June 15, 2021, but it might seem to you that we've been talking about this statement for a long time. We started out with a generous implementation period for GASB 87, which was originally scheduled to become effective for periods two and a half years after issuance. Then, due to COVID-19, GASB granted an 18-month postponement for GASB 87--based on pleas for mercy from governments--even while permitting only a one-year deferral for other pronouncements. This resulted in an unusually long total lead time between the promulgation of the standard and its required implementation. The good news is that during this extended period, GASB provided lots of implementation guidance to help, and GFOA has discussed the new accounting for leases in many articles, conference sessions, and webinars.

Many governments are now well into the fiscal years for which they will first issue GASB 87-compliant financial statements. Having completed (or nearly so) the process of identifying contracts that are or include leases, many governments are now facing the devil in the details of implementation. Specifically, many are pondering how to (1) determine the lease terms; (2) classify leases as short-term or other than short-term leases; (3) calculate (or measure, in GASB parlance) lease liabilities and lease assets (for lessees), and lease receivables and deferred inflows or resources (for lessors); and (4) prepare the necessary journal entries for preexisting leases at transition.

To answer some of the questions, let's think about an example of a lease that predates implementation. A complete set of assumptions and questions and answers about the implementation for such a lease from the perspectives of governments on both sides of the transaction, along with an Excel file containing calculations and journal entries for the implementation, are available on GFOA's website at gfoa.org/materials/lease-example-preexisting. This article will discuss questions and answers generally, from the lessee's perspective, but you'll have to go to the website to see the numbers and the answers to many of the same questions from the lessor's perspective.

The basic assumptions for our example are the following:

* A city with a June 30 fiscal year end (FYE) leases a building to house certain administrative functions.

* The 10-year lease term began on July 1,2012 (initial inception) and will end on June 30, 2022.

* The lease is accounted for in the city's general fund and was originally properly accounted for as an operating lease, based on pre-GASB 87 generally accepted accounting principles.

* The rent is paid annually on July 1 for the July to June year. The rent payment was set...