Accounting Changes Effective for Leases Have Been Delayed. What Now?

Here’s some good news related to the COVID-19 pandemic: school districts have more time to comply with the new accounting standard for leases.

The new accounting requirement, Statement No. 87 (Leases) of the Governmental Accounting Standards Board (GASB), originally took effect for reporting periods beginning after December 15, 2019. However, GASB has issued new guidance, Statement No. 95 (Postponement of the Effective Dates of Certain Authoritative Guidance) that extended the effective date to reporting periods beginning after June 15, 2021, with earlier application encouraged.

With this delay school districts have an extra year to fine tune the implementation plan. Some districts may have already started the implementation process or may have committed time and effort to gathering information for implementation. If you haven’t already begun to prepare for this accounting change, you should start now to make sure implementation goes as smoothly as possible.

Depending on your circumstances, you may decide to use the additional time, or you could early adopt.

Here are some key considerations for staying on track:

1. Lease contracts. Has your implementation team identified all contracts that could be subject to the lease standard? All leases are contracts, but not all contracts will be leases. To make the determination, you’ll need to have the full picture of what is out there. When asking other departments, avoid using the word “Lease” and just ask for any active “Contracts.” Those outside of the accounting world may not associate the two words with teach other.
2. Lease terms and conditions. Have you started documenting lease terms such as commencement dates, extension / termination options, fixed / variable payment components, residual value guarantees, and lease incentives? This part of the process can be time consuming because these terms and conditions can be located in different places in a contract. For easy reference, keep copies of the contracts close to where you are summarizing this information.
3. Interest rate. Have you identified interest rates? For GASB 87, lessees should use the stated interest rate, the interest rate implicit in the lease, or an interest rate that represents the incremental borrowing rate. What does this mean?
   1. The stated rate is simply that – the interest rate that is clearly stated in the lease contract, which should correlate to any amortization schedules provided. Most lease contracts will not have this.
   2. The implicit rate is not usually specified in the lease contract, but must be inferred by the lessee based on additional information. The lessor could provide this information, since they would have to know the interest rate charged in order to determine profit margins; however, they may not be willing to share this information as it could be deemed proprietary. Does the lease contract have an amortization schedule showing principal and interest payments? You can usually formulate the implicit rate from this schedule using an Excel formula.
   3. If the implicit rate is not readily determinable, you will need to develop an interest rate that represents your incremental borrowing rate at the date of implementation. This is defined as the rate you would be charged by a financial institution for obtaining collateralized debt with terms similar to your lease(s). There is no one-size-fits-all approach to developing this rate, so this may be a conversation between your finance staff and external advisors.
4. Controls. Have controls been established to ensure new leases, lease changes or lease amendments are communicated to the business office in a timely manner? These controls should be in place now so that your implementation team has accurate information to consider for recording these lease liabilities and lease assets.

Many school districts are opting to engage outside CPA firms to help them understand their current state and the scope of process changes that might be required to meet the lease standard, as well as to develop a plan for how to get there. In fact, approached correctly, this change can serve as a prime opportunity to gain a better understanding of overall financial commitments, and ultimately should improve financial reporting processes.