Forever Leases.

• Author: Levine, Michele Mark
• Position: IN PRACTICE: ACCOUNTING

In November 2020 the Governmental Accounting Standards Board (GASB) issued an exposure draft titled Implementation Guidance Update--2021. The exposure draft (ED) has 28 new questions and answers--21 of which are on the topic of leases--and four amendments to previously issued questions and answers. The ED also includes five new questions and answers on fiduciary activities and one each on derivative instruments, grant revenue recognition, capitalization policies, revenue from fines, major fund determination, and intra-entity asset transfers. Finally, the ED proposes to supersede four previously issued questions and answers related to intangible assets.

LEASES

The lease guidance being proposed in the ED would be the third round of implementation guidance related to GASB Statement 87, Leases, bringing the total number of questions and answers issued on the topic to 120. When issuing GASB Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance, GASB provided a one-year deferral for most authoritative guidance previously due to become effective for periods beginning after June 15,2018, but prudently instead provided a longer, 18-month postponement for implementation of GASB 87. This has given both governments and GASB additional time to recognize and address the myriad ! questions and concerns that have been arising as governments work toward implementation of a standard that is proving to be surprisingly challenging.

Below is a summary of the leases-related questions and answers proposed for the 2021 update of GASB's Comprehensive Implementation Guide. If the ED were to be issued as final guidance in its present form, these proposed clarifications would be made authoritative (Level B) generally accepted accounting principles (GAAP).

Questions 4.7 and 4.8 relate to the definition of a lease.

Agreements between departments within a government are not leases, as a lease is required to convey control of the right to use another entity's underlying asset. In a contract where all payments are variable payments based on future events, and thus no lease liability and lease asset (for a lessee) or a lease receivable and deferred inflow of resources (for a lessor) would be reported, the payments would nonetheless be considered when determining if the contract is, in fact, a lease (i.e., it is an exchange or exchange-like transaction).

Question 4.9 relates to provisions that allow for a lease to be terminated due to a violation of lease terms.

A provision that allows for a lease to be terminated due to a violation of the lease terms would not be considered a termination option for the purpose of determining the lease term.

Question 4.10 relates to lease term reassessment.

When an advance notice period is required for either party to exercise rights that both have to terminate a lease without the consent of the other party, that notice period is the noncancellable period of the lease, and any remaining period under the agreement is a cancellable period. At each year end, the reporting government must reassess the lease term. Thus, if no notice of termination has been given by either party, and other factors remain unchanged, the reassessed noncancellable period would again be the advance notice period.

Question 4.11 relates to noncontiguous periods of a lease term in the determination of whether a lease is a short-term lease.

The maximum possible term of a lease, for the purpose of determining if a contract is a short-term lease, includes only the periods of time during which control of the underlying asset is conveyed to the lessee, rather than the total length of time during which...