United States

Managing lease accounting for public and private higher education

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Both private colleges and universities and public colleges and universities have new lease accounting standards that will fundamentally change how leases are accounted for.

Private colleges and universities will be adopting the Financial Accounting Standards Board’s (FASB’s) new standard on lease accounting, Accounting Standards Codification (ASC) 842, which will require virtually all leases to be recorded on an institution’s balance sheet.

  • For institutions with public debt, the effective date is for fiscal years beginning after Dec. 15, 2018.
  • For all other entities, the update goes into effect for fiscal years beginning after Dec. 15, 2020.
  • Early adoption is allowed.

Public colleges and universities, on the other hand, must adhere to Government Accounting Standards Board Statement Number 87, Leases (GASB 87). The requirements of this statement are effective for reporting periods beginning after Dec. 15, 2019. However, earlier adoption is encouraged.

There are some significant differences under each standard, but the underlying objectives are the same. Both standards were established to better meet the information needs of financial statement users by improving accounting and financial reporting for leases.

The most significant change under the new ASC 842 and GASB Statement No. 87 is the recognition of practically all contracts that are considered leases, as defined in the respective standard, over a one-year term, on the statements of financial/net position. The determination as to whether a contract is, or contains a lease, as well as appropriate lease terms under the new standard requires significant judgments and estimates, which may make it difficult for institutions to easily determine the impact of the respective new standard.

The impact goes beyond the presentation of leases on your institution’s financial statements. It will require changes to business processes, systems, policies and procedures as well as change management and communication within institutions.

A significant challenge for most institutions may be identifying all contracts that should be included in the lease portfolio to ensure completeness of the portfolio, including the evaluation of embedded leases and leases with multiple components. Furthermore, institutions should consider whether they would benefit from a technology solution to aid in the implementation and administration of the loan portfolio. Managing the lease portfolio manually with spreadsheets may pose challenges due to the need for multiple workbooks to accommodate the lease schedules and the risk of error when keeping up to date as terms change over the course of the lease. These factors can add additional labor requirements to a typically lean accounting function.

Lastly, some higher-education institutions could have challenges in centralizing and abstracting all of the leases. If there is decentralized lease ownership and document storage, it will be necessary to develop procedures to aggregate the lease documents. It may require significant resources and time to aggregate abstracts all of the leases to apply the new accounting standards.

Identify, compile, evaluate

While it may seem like institutions have plenty of time to implement the lease standard, such procedures as identifying, compiling and evaluating the lease portfolio, and developing policies and procedures will take time.

Institutions should start their implementation of ASC 842 or GASB 87 now, since there are many factors that will affect the timeline of an already shortened window of implementation.

The following is a sampling of some of the key steps your institution should consider to help ensure a successful adoption of the new standards, including the implementation of new technology systems to manage the accounting and disclosures:

  • Start planning now: Identify a core team that can develop an implementation plan to meet your institution’s needs and goals.
  • Analyze contracts and business requirements: Obtain an understanding of the lease portfolio. Perform a deep-dive review of a sample of contracts for the various lease types. Obtain an understanding of the business organization, process and technology landscape. Develop and document business systems requirements.
  • Define the ASC 842 or GASB Statement No. 87 impact: Determine appropriate lease accounting treatment under the appropriate standard. Identify policy elections management wishes to utilize. Identify any key ASC 842 or GASB 87 gaps that management will need to address throughout the implementation.
  • Develop an operational and technology strategy: Define future state lease accounting requirements and evaluate requirements against the current technology environment or other vendors in the market as appropriate. Lastly, consider the viability of implementing the selected technology strategy under current accounting standards to address lease abstraction in a more timely manner, and then subsequently planning an implementation to the new standards as deadlines approach.
  • Create a comprehensive lease accounting implementation plan: Consolidate ASC 842 or GASB 87 accounting findings, process, policy and technology findings into a comprehensive 842/87 adoption plan. Identify key decisions and risks to adoption and initiate implementation of the new standard within the selected technology platform.

Many colleges and universities could face an uphill battle to adjust to the new level of judgments and estimates required under the ASC 842 and GASB 87 lease accounting guidelines. However, a comprehensive implementation strategy and approach can help your institution comply with the new standards and enable an effective process for the ongoing management of and accounting for leases.

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