Implementing GASB 87: Government entities learn from public companies
INSIGHT ARTICLE |
Government entities are finding compliance with GASB 87, the Government Accounting Standards Board’s new standard on lease accounting, to be a complex task. However, these organizations are up against the clock, as the standard becomes effective for periods beginning after June 15, 2021 (e.g., July 1 for organizations with June 30 fiscal year-end).
Luckily, the lease accounting compliance experiences of public companies—that had earlier deadlines—offer some lessons that government entities can learn from, according to a recent LeaseQuery study.
Notably, public companies learned that the complexity of the preparation effort can be substantial and, perhaps not surprisingly, the time required to implement the standard exceeded all expectations. The study also noted specific technical accounting challenges encountered during the implementation.
In addition, companies found it difficult to identify and implement the systems needed to support adoption of the standard and maintain its ongoing accounting and disclosure requirements. LeaseQuery reports that 67% of organizations in the later stages of transition to a new lease accounting standard have experienced difficulty with collecting data, modifying business processes and project managing the enterprisewide effort ranking as the top three challenges.
The following are three lessons government entities should consider when implementing GASB 87:
1. Underestimating challenges
With only 71% of government agencies in the first stage of GASB 87 transition, this sector faces the highest risk of falling behind. In addition, looking forward, inventorying leases has proven to be one of the most time-consuming aspects for companies in later stages of the transition. Nevertheless, even organizations that are on or ahead of schedule with implementation may be misjudging the work effort remaining before day one compliance, much like public companies did. Many public companies struggled in the first quarter of adoption with issues such as proving the accuracy and completeness of their lease population.
2. Choosing a technology solution
Given the ongoing calculations, reporting and disclosure requirements, a technology solution can help any company’s compliance with GASB 87. For some entities, Microsoft Excel can be an appropriate tool to manage a small number of leases that lack complexity. For example, Lease Query finds that 88% of companies with one to 15 leases utilize Excel or spreadsheets; but as the number of leases climbs, lease accounting software usage increases as well. However, with so many lease accounting technology solutions available, what are the critical factors for making the right choice?
Companies often choose technology solutions based on price, functionality, user interface and, of course, the ability of the system to handle GASB 87 accounting. Government entities should consider asking vendors for information regarding:
- Client references to understand the pros and cons encountered when implementing a system
- The level of support from the vendor
- The capacity of the vendor or a third party to implement the system
- The ease of the abstraction process
3. Data abstraction
Abstraction of the lease data is one of the longest and most arduous parts of the implementation process. This process can be made more complex if entities have not developed a robust plan to help guide the abstraction process. Some key considerations include:
- Lease portfolio: Understand the breakdown of leases between real estate, non-real estate and number of assets, including assessment of short-term and immaterial leases
- Select the technology solution: Before abstraction can begin, it is preferable to have the technology system selected and the minimum configuration should be completed (minimum information the system requires, such as the legal entity list, cost center, general ledger accounts, etc.).
- Noncontract data considerations: Noncontract data is often required and can vary based on the technology solution selected and a company’s specific accounting policies. Noncontract data can include lease terms (considering renewals and terminations), discount rates, profit centers, etc.
Government entities should dedicate enough time early in 2021 to adopt the new lease accounting requirements as well as invest time into testing and training their teams in order to achieve success.