A new accounting rule requires districts and charter schools that lease land, buildings, and equipment from others to list these commitments in their financial statements along with other debts and liabilities.
From office equipment to buildings, leases are part of just about every school district and charter program’s operations. When it comes to accounting for these transactions, leases have often been treated as rentals and not listed as debts and liabilities in a district’s financial statements. But that’s about to change.
It requires districts and charter schools that lease land, buildings, and equipment from others to list these commitments in their financial statements along with other debts and liabilities.
Depending on the size of your district or charter school system and its number of lease obligations, this change could have a significant impact on your overall financial picture.
Start the process now
If you haven’t already begun to prepare for this accounting change, you should start now to make sure implementation of this new requirement goes as smoothly as possible.
- Start the conversation. Estimate the potential impact recording the lease asset and liability on the statement of financial position will have on key ratios, as well as items like debt limitations, bond covenants, grant agreements and your composite score. Start the conversation to restructure or revise covenants, as needed, to ensure continued compliance in future years.
- Establish an implementation team. Consider the benefits of including staff outside of finance, such as procurement, legal or information technology.
- Develop a timeline. The implementation team should devise a timeline for adoption. Can you use existing software to track and account for leases, or should a new software be purchased? This entails a cost/benefit analysis unique to your district or charter system, based on the number of leases and available resources on hand.
- Gather the information. Start gathering existing leases and make a spreadsheet of pertinent facts. Include terms (interest rate, payments) and start and end dates, including renewal options.
- Develop policy statements to support the process. Develop accounting policy statements to outline the process for making judgments with a significant impact on measurement. For example, departments that initiate lease agreements may need to better document lease terms, options, and payment provisions, and communicate those factors to the finance department for proper lease reporting.
- Set up a control system. Implement controls to identify leases and lease modifications. When there is a change in a lease term, estimated lease payment amounts, or other components of lease agreements, such information may need to be communicated to finance personnel in a timely manner because it may affect the amounts reported in the financial statements.
- Consider your capitalization policy and its impact. Some districts may consider changing their capitalization threshold for assets and/or the entity’s established guidelines for useful lives.
- Make a plan for addressing complicated contracts with multiple components.Try to avoid headaches down the road that could result from undiscovered aspects of complex lease contracts.
- Consider your chart of accounts and how departments currently record financing arrangements.
- Don’t forget there are some exclusions. Under the new standard, the following are excluded: short-term leases, regulated leases, contracts that transfer ownership, supply contracts, the lease of an asset that is an investment, inventory, intangible assets, biological assets, assets financed with outstanding conduit debt, and service concession arrangements.
Many school districts and charter programs 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 new 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. Contact Weaver for help with the process.