GASB No. 87 and 96 require ongoing monitoring of lease and SBITA agreements for modifications, which may necessitate remeasurement, partial termination, or even treatment as a new contract, depending on the nature of the change.
GASB No. 87, Leases and GASB No. 96, SBITAs have been fully rolled out by now. Amortization schedules have been set in place, right-to-use asset carrying values and related liabilities are rolled forward period after period. However, one must not simply let the amortization tables run their course without considering relevant changes in the agreements. In addition to evaluating any new agreements entered, it is important to identify any modifications to active leases and SBITAs and appropriately accounting for the amendments.
Amendments to contracts may be in the following forms:
- change in the contract price
- lengthening or shortening the term
- addition or removal of an underlying asset
When provisions of a lease or SBITA agreement have been modified, wherein the modification does not diminish the lessee’s right to use the underlying asset, the lease liability should be remeasured and the lease asset be adjusted by the difference between the remeasured liability and the liability immediately before the remeasurement. If the reduction causes the carrying value of the asset to be reduced beyond zero, the remainder is treated as a gain.
Discount rates are updated as part of remeasurements if at least one of the following changes have occurred and the change significantly affects the amount of the liability:
- a change in term
- a change from reasonably certain exercise to not reasonably certain to exercise a purchase option, or vice versa
For instances where the term length has been shortened or the number of underlying assets is reduced, such amendments are treated as partial terminations. In this case, the lessee’s right to use underlying assets has been diminished. The lessee no longer has the same right to use the underlying asset, therefore a reduction of the carrying values of the asset is accounted for to represent the diminished right to use. For full terminations, the asset and liability are derecognized, and the difference is reported as a gain or loss.
However, amendments may be treated as a new lease or SBITA, separate from the existing contract, if both of the following conditions are present:
- addition of an asset that was not included in the original contract
- the increase in payments for the addition appear to be reasonable
Lease terms should be reassessed if at least one of the following occurs:
- election to exercise an option that was previously deemed not reasonably certain to be exercised.
- election to not exercise an option that was previously determined reasonably certain to be exercised
- occurrence of an event specified in the contract that requires an extension or termination
Enforcing an effective contract management system and maintaining an inventory of lease or subscriptions terms are paramount to identify any applicable amendments to an entity’s reported leases and SBITAs. Periodic re-evaluation may be needed to ensure leases and SBITAs are reported in accordance with their corresponding GASB pronouncements.
