United States

3 steps to adopting and implementing GASB 87 lease accounting rules

New lease accounting standard presents complex challenges

INSIGHT ARTICLE  | 

A public hospital advertising on a billboard. A state college renting auxiliary classroom space near campus. A city government leasing wireless routers. 

Each of these entities is subject to comprehensive lease accounting rules established by the Government Accounting Standards Board (GASB) in “Statement No 87, Leases.” The new standard, which represents a major change to accounting for leases, went into effect for reporting periods beginning after Dec. 15, 2019. Government entities face significant challenges in adopting and implementing such broad changes. But this also is an opportunity to centralize how organizations manage their lease portfolios and to evaluate controls and procedures around contracting.  

Here are three important steps for government entities to take as they start their journeys to compliance with GASB 87 rules.

1. Understand the parameters of GASB 87

This new, single model of lease accounting requires lessors and lessees to record leases on their balance sheet, with few exceptions. Doing so can require complex assessments under the new rules. 

For example, the lease term is measured not only by the duration of the agreement, but also renewal options that are “reasonably certain” of being exercised. The degree of certainty can depend on factors such as economic incentives, favorable rents and any relevant precedents. “It can be a complex analysis based on relevant facts and circumstances that occur at the commencement of the lease,” said Bob Malinowski, RSM senior director of technical accounting consulting.  

For lessees, most leases will be accounted for like capital leases were under the old standard. Meanwhile, the process for lessors essentially mirrors the lessee model. Lessors should recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term. But there are exceptions, such as short-term leases, for which total possible terms are 12 months or less. Also, developing the discount rate is crucial to putting leases on the balance sheet. “It directly affects what will be included in financial statements,” Malinowski said, “and it introduces complexity we typically didn’t have to deal with before when most leases were accounted for as operating leases.”

2. Collect lease data

The new standard applies to leases of property, land and equipment. Within those categories, public entities must identify their complete lease population, which is not necessarily obvious. 

“You will be evaluating a lot of things as potential leases that in the past we probably didn’t worry about,” said Brian Schebler, RSM national director of public sector services. For example, leases can be disguised as service contracts, such as ones for dining services, copiers or printers. A lease might exist in an agreement for advertising space on a billboard or the location of an IT data center. These are considered embedded leases.

“Under previous guidance there was less risk in this area,” said Kirk Rogers, RSM partner, technical accounting consulting. “Now you have to be more precise in this area from a control perspective.” Because of such complexities, government entities commonly underestimate the time required to identify and centralize their lease data. It’s important to strategize how to manage and organize that process.

Entities should keep their lease information in one place. It may help to adopt a naming convention for all electronic lease files, tagging them with fields that distinguish respective categories. For example, the first field might identify whether it’s an equipment lease or real estate lease. The second field could distinguish location. Completing a lease portfolio also involves reviewing footnote disclosures, surveying business unit leaders about potential leases in their department, and analyzing cash disbursements for repetitive payments.

3. Consider the use of technology

Software can help centralize all of an entity’s leases onto a single platform, perform calculations, assist with lease administration and provide information necessary for reporting. Entities must examine their needs and organizational readiness to determine whether Microsoft Excel or a third-party software program best suits them. 

Rogers believes third-party software is superior for entities with a relatively large number of leases but can also prove to be very beneficial for entities with smaller lease portfolios. “When you use Excel, you’re prone to higher risk of errors that could occur in the spreadsheets and the calculations in updating them,” Rogers said. “It’s not a systematic routine updating Excel spreadsheets, and you can’t leverage down the process as you could in a system.”

As third-party software continues to develop, programs range in their capabilities. Basic software can perform calculations and generate reports. More advanced technology can onboard leases, remind users of renewals, account for footnote disclosures and more.

A trusted advisor can help implement this software and centralize an organization’s lease portfolio as part of a comprehensive plan tailored to the entity’s needs.


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