Accounting for leases
FINANCIAL REPORTING INSIGHTS |
The Governmental Accounting Standards Board recently issued Statement 87, Leases, which establishes a single model for lease accounting by state and local governments, with limited exceptions (most notably for “short-term” leases with a maximum possible term of 12 months). Statement 87 provides guidance for lease contracts for nonfinancial assets including vehicles, heavy equipment and buildings, but does not apply to nonexchange transactions (including donated use of assets) or leases of intangible assets such as patents and software licenses.
Under Statement 87, a lessee government is required to recognize a lease liability and an intangible right-to-use asset. The lease liability should be measured at the present value of payments expected to be made during the lease term (less any lease incentives). The lease asset should be measured at the amount of the initial measurement of the lease liability, plus any payments made to the lessor at or before the commencement of the lease term and certain direct costs. A lessee also should report the following in its financial statements:
- Amortization expense related to the lease asset (similar to depreciation) over the shorter of the term of the lease or the useful life of the underlying asset
- Interest expense related to the lease liability
- Note disclosures with information about the lease, including a general description of the leasing arrangement, the amount of lease assets recognized and a schedule of future lease payments to be made
A lessor government is required to recognize a lease receivable and a deferred inflow of resources. A lessor will continue to report the leased asset in its financial statements. The lease receivable should be measured at the present value of lease payments expected to be received during the lease term. The deferred inflow of resources should be measured at the value of the lease receivable plus any payments received at or before the commencement of the lease term that relate to future periods. A lessor also should report the following in its financial statements:
- Lease revenue, systematically recognized over the term of the lease, corresponding with the reduction of the deferred inflow
- Interest revenue related to the receivable
- Note disclosures about the lease, including a general description of the leasing arrangement and the total amount of inflows of resources recognized from leases
Other issues addressed in Statement 87 include accounting for lease terminations and modifications, sale-leaseback transactions, nonlease components embedded in lease contracts (such as service agreements) and related-party leases. Statement 87 is effective for reporting periods beginning after December 15, 2019, with earlier application encouraged.