There have undoubtedly been headaches along the way, but most districts are well along on the path to implementation of GASB 87. As you near the end of the process for implementation, you probably still have questions about some details.
If you are on the team that is responsible for lease accounting in your district, congratulations. It has been a tough couple of years collecting the information and preparing to comply with Statement No. 87 (Leases) of the Governmental Accounting Standards Board (GASB).
You know the basics. You have gone through the painful process of organizing your lease agreements, extracting data from your system and had discussions with other departments to ensure completeness.
There have undoubtedly been headaches along the way, but most districts are well along on the path to implementation. Hopefully, it has helped you gain a better understanding of overall financial commitments and improved your district’s financial reporting processes.
As you near the end of the process for implementation, you probably still have questions about some details.
Threshold for inclusion. Like many things in accounting, there is no black and white answer to the question: “What threshold should we use when determining what leases should be included under the new lease standard?” This is going to vary from district to district. A lease for $25,000 might not be considered material for District “A” but the same lease would be considered material for District “B.” It is also important to remember that the leases may have a material effect in the aggregate. In this example, individually the leases may be immaterial but when the total is aggregated the leases are material. Seek guidance from your auditors if you are unsure.
Financed purchases. When reviewing lease agreements, a district should determine whether it will own the asset by the end of the lease term. If ownership transfers, the agreement should be treated as a financed purchase, not a lease. Some leases allow for the option to purchase at the end of the lease. In these cases a determination should be made on whether it is probable that the option to buy will be exercised. If the option will be exercised, the lease should be considered a financed purchase. If it will not be exercised, the lease should be considered a leased asset under GASB 87. Be careful not to confuse a financed purchased with a bargain purchase option clause. Bargain purchase options are not the same as a financed purchase.
Embedded leases. Don’t forget about the contracts that are really embedded leases. To assist with identifying leases that may have slipped through the cracks, ask yourself:
- Does the district have a contract that refers to physical assets not owned by district? (Remember, the agreement may not say “rent” or “lease.”)
- Is the district obtaining all of the benefits from the asset for a period of time (exceeding one year…of course)?
- Does the district get to determine how this asset is used?
- Is there a fair value exchange as part of the contract?
If you answered “yes” to these questions, you may have an embedded lease. These agreements may have been identified as a “service” agreement and not evaluated for inclusion under GASB 87. Examples of contracts for school districts with embedded leases include:
- Janitorial services,
- Warehouse operations,
- Cafeteria services, and
- Transportation services.
Non-lease components. Unfortunately, not all of your lease agreements are straightforward. You may have agreements that include non-lease components, which are portions of the agreements not related to the use of the leased asset. These should be excluded from the district’s calculations.
Examples of non-lease components include:
- Real estate taxes
- Property insurance
- Janitorial services
- Common Area Maintenance (CAMs)
Is your district the lessor? In some cases, the district is receiving revenue from the rental of assets such as an office building, stadium, gym, school, or activity center. The accounting for leases as the lessor will mirror the accounting of agreements as the lessee. The district will account for a lease receivable and a corresponding deferred outflow. The district should continue to report the underlying asset related to the agreement while depreciating the asset based on the district’s capitalization policy.
Exclude subscription-based information technology arrangements. These arrangements, which we covered in a previous blog post is covered in another accounting statement, GASB 96, which is scheduled for implementation in 2023.
Take a deep breath and pat yourself on the back. You’ve almost made it to the finish line with this implementation and hopefully your district’s finances and future obligations are clearer as a result.