Project Pages

Leases—Reexamination of NCGA Statement 5 and GASB Statement 13

Project Description: The objective of this project is to reexamine issues associated with lease accounting, considering improvements to existing guidance. Current guidance is provided by National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments and GASB Statements No. 13, Accounting for Operating Leases with Scheduled Rent Increases, No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and No. 65, Items Previously Reported as Assets and Liabilities. Statement 62 incorporated the provisions of FASB Statement No. 13, Accounting for Leases, as amended and interpreted, into the GASB’s authoritative literature.

Status:
Final Statement, Leases, approved: June 2017
Exposure Draft approved: January 2016
Preliminary Views approved: November 2014
Added to Current Agenda: April 2013
Added to Research Agenda: April 2011

Leases—Project Plan

Background: Governments routinely enter into leases. Under the current authoritative literature, many of these leases are reported as operating leases. Even though operating leases represent long-term commitments to make payments, no liabilities are reported, although there are disclosures. Likewise, no assets are reported when governments have long-term rights to receive operating lease payments. In Concepts Statement No. 4, Elements of Financial Statements, the Board established definitions of assets and liabilities. This project provides an opportunity for the Board to consider whether operating leases meet the definitions of assets and liabilities.

In 2010 and 2013, the FASB and the International Accounting Standards Board (IASB) issued Exposure Drafts proposing to replace private sector guidance for leases. The IASB and FASB issued final guidance in January and February 2016, respectively. Because of the similarities between private-sector leasing guidance and the current public-sector leasing guidance and the significant changes of the revised FASB/IASB guidance, the project staff received inquiries regarding whether there are any plans for the GASB to update its leasing guidance.

The GASB undertook this project during the final stages of the similar FASB and IASB projects to maximize efficiency and timeliness. A simultaneous lease accounting project on the GASB agenda provided the opportunity to follow the progress of the FASB and IASB projects to assess on a contemporaneous basis new and amended leasing guidance in the context of the state and local government environment. The GASB project provides an opportunity to reassess the existing GASB guidance, as well as consider improvements in the FASB and IASB projects in the context of the unique nature of governmental entities and the complexities of their leasing transactions.

Finally, part of the GASB’s strategic plan is to evaluate the effectiveness and impact of existing standards that have been in effect for a sufficient length of time. NCGA Statement 5 was issued in 1982 and GASB Statement 13 in 1990.

Accounting and Financial Reporting Issues: The major topic being considered is the forms of financial reporting display and disclosure that would meet financial statement user needs. The project is considering the following issues:
  1. Are current accounting and financial reporting standards, including the distinction between types of leases, appropriate to meeting essential user needs?
  2. If current standards are not considered adequate, what other requirements should be considered?
Project History:
  • Pre-agenda research approved: April 2011
  • Added to current technical agenda: April 2013
  • Task force established? Yes
  • Deliberations began: August 2013
  • Preliminary Views approved: November 2014
  • Comment period: November 2014–March 2015
  • Field test completed: March 2015
  • Public hearings held: April 2015
  • Redeliberations began: April 2015
  • Exposure Draft issued: January 2016
  • Comment period: January–May 2016
  • Public hearing held: June 2016
  • Redeliberations began: August 2016
  • Final Statement issued: June 2017

Leases—Recent Minutes


Minutes of Teleconference, June 12, 2017

The Board reviewed and provided clarifying edits on the ballot draft of the final Statement, Leases. The Board then voted unanimously to approve the issuance of Statement No. 87, Leases. (Note: Mr. Previdi submitted his vote after the meeting.)

Minutes of Meetings, May 23–25, 2017

The Board reviewed a preballot draft of the final Statement, Leases, and provided clarifying edits on the draft document. The Board also tentatively decided that modifications of lease contracts that lengthen leases should result in remeasurement rather than be reported as separate leases. The Board then agreed to move forward to a ballot draft of the final Statement.

Minutes of Meetings, April 12–14, 2017

The Board reviewed a draft of the Summary, Standards, and Background sections of the proposed Statement, Leases, and provided clarifying edits on the draft document. The Board then agreed to move forward to a preballot draft of the final Statement.

Minutes of Meetings, March 7–9, 2017


The Board reviewed a draft of the Standards section of the proposed Statement, Leases, and provided clarifying edits on the draft document.

Minutes of Teleconference, February 6, 2017

The Board concluded initial redeliberations on the proposals in the Exposure Draft, Leases.

The Board tentatively decided to carry forward the proposal that governments generally separate contracts into lease and nonlease components and separate contracts that contain multiple underlying assets. Next, the Board tentatively agreed that the final Statement need not provide an explicit exception for contracts with insignificant nonlease components, noting that the Statement need not be applied to immaterial items.

The Board then tentatively agreed to carry forward to the final Statement the criteria in paragraph 54 of the Exposure Draft for separation of leases involving multiple underlying assets. In response to respondent comments about the effect of capitalization policies, the Board tentatively agreed that the Basis for Conclusions should include a reference to Question 7.9.8 from Comprehensive Implementation Guide 2016-2017, which addresses capitalization issues.

The Board next considered a respondent comment about whether a right of substitution would cause a lease to be a service agreement. The Board tentatively agreed that the standards proposed in the Exposure Draft provide sufficient guidance to determine whether a contract that contains a service component is a lease or a pure service agreement.

The Board discussed the proposal set forth in the Exposure Draft for allocation of consideration to multiple lease components. The Board tentatively decided to modify the provisions to state that lessors and lessees should first use the prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and the use of professional judgement. The Board also tentatively agreed that, if a contract does not include prices for individual components or if those prices are not reasonable, lessors and lessees should use professional judgement to determine their best estimate for allocation of the contract price to each component. Professional judgment should maximize the use of observable information; for example, using readily available observable stand-alone prices. The Board also tentatively decided that the final standard should not include a policy election that would permit governments to not separate components of a contract for all leases with multiple components.

The Board next discussed whether additional guidance should be provided to further clarify the term readily available. The Board tentatively agreed that no additional guidance was needed.

In response to respondent comments, the Board also discussed (1) whether a lessor government would be required to identify the prices for each component and disclose those prices to the lessee government and (2) whether independent verification of stand-alone prices for each component should be required. The Board tentatively agreed that no additional guidance was necessary regarding those topics in the final Statement.

The Board then tentatively agreed to not carry forward the flowchart regarding allocation of consideration to multiple components.

The Board next discussed additional outreach that was conducted regarding guidance for lease incentives. The Board tentatively agreed that the Standards section of the final Statement should include a definition of the term lease incentive as follows:

As used in this Statement, a lease incentive is a payment made to, or on behalf of, the lessee, for which the lessee has a right of offset with its obligation to the lessor, equivalent to a rebate or discount. Lease incentives include assumption of a lessee’s preexisting lease obligations to a third party, other reimbursements of lessee costs, rent holidays, and reductions of interest or principal charges by the lessor.

Next, the Board discussed reporting guidance for lease incentives and tentatively agreed that the Standards section of the final Statement should include the following guidance:

Lease incentives reduce the net amount that a lessee is required to pay for a lease. All lease incentives received by a lessee at or before the inception of a lease are included in initial measurement by directly reducing the amount of the lease asset. (See paragraph 24.) Lease incentives to be provided after the inception of the lease should be accounted for as a reduction of the lease payment in the year provided, and measured by lessees consistently with the lessee’s lease liability (paragraphs 15–23) and by lessors consistently with the lessor’s lease receivable (paragraphs 37–44). Accordingly, lease incentives to be provided after the inception of the lease are included in initial measurement, and any remeasurement if they are fixed or fixed in substance, whereas variable or contingent lease incentives are not included in initial measurement. Lease incentives to be provided after the inception of the lease should be accounted for as reductions of lease payments in the periods provided.

In response to respondent comments, the Board tentatively decided to delay the effective date one year. The Statement would be effective for periods beginning after December 15, 2019.

The Board then discussed, and tentatively agreed to carry forward to the final standard, the transition provisions in paragraphs 78–80 of the Exposure Draft, with a modification to paragraph 78 to indicate that earlier application of the guidance is encouraged.

The Board discussed respondent requests to include illustrations or examples, and tentatively decided that illustrations and examples need not be included in the final Statement but would be considered in the future as part of potential implementation guidance.

The Board next discussed whether the expected benefits of information to users and other stakeholders from the requirements set forth in the final standard exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the perceived implementation and ongoing costs are justified when compared to the expected benefits associated with the requirements to be included in the final Statement.

Lastly, the Board discussed the characteristics of the financial information that would be provided as a result of the final standard. The Board tentatively agreed that the accounting and financial reporting requirements to be presented in the final standard would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, January 17-19, 2017

The Board continued redeliberations on the proposals in the Exposure Draft, Leases.

The Board tentatively decided to carry forward an exception to the proposed lessor recognition and measurement guidance for certain regulated leases, such as airport-aeronautical agreements and other leases with similar characteristics, but with modifications to address respondent concerns. The Board tentatively agreed that, to qualify for the exception, the lease must be subject to external laws, regulations, or legal rulings that establish all of the following requirements: (a) the lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator; (b) lease rates should be similar for lessees that are similarly situated; and (c) the lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided that the lessee’s use of the facilities complies with generally applicable use restrictions.

The Board next discussed additional research on the proposed general lessor disclosure in paragraph 49b, which would require disclosure of the carrying amount (and accumulated depreciation) of assets on lease, or held for leasing, by major classes of assets. The Board tentatively decided not to carry that disclosure forward (except for certain regulated leases). The Board next tentatively agreed to carry forward the proposed disclosures for certain regulated leases, with modifications intended to conform with edits tentatively made to the general lessor disclosure requirements.

Next, the Board discussed, and tentatively agreed to carry forward, the provisions in paragraphs 63–68 of the Exposure Draft for lease terminations and modifications, with clarifying edits.

The Board then discussed the provisions in paragraphs 69 and 70 for sublease transactions. The Board tentatively agreed to carry forward those provisions and to add a discussion in the Basis for Conclusions explaining why a transaction that relieves the original lessee of its obligation under the lease is a lease termination rather than a sublease.

The Board also tentatively agreed to carry forward the provisions in paragraphs 71–75 of the Exposure Draft regarding the treatment for sale-leaseback and lease-leaseback transactions, with clarifying edits.

The Board tentatively decided to carry forward the provisions in paragraphs 76 and 77 for the treatment of intra-entity leases and leases between related parties, without modifications.

Lastly, the Board reviewed aspects of the proposed lessee and lessor reporting models for which symmetry of accounting had not been fully achieved. The Board tentatively agreed that the remaining areas of differences between lessee and lessor accounting are warranted.

Minutes of Meetings, December 5-8, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the following topics: the lessor model, lessor disclosure requirements, and the notion of symmetry between the proposed accounting guidance for lessees and lessors.

The Board tentatively agreed to carry forward the provision that a lessor should recognize a lease receivable and a deferred inflow of resources at the beginning of the lease term and any initial direct costs as an outflow. The Board also tentatively agreed to carry forward the provisions for initial measurement of the lease receivable.

The Board next discussed the provisions of the Exposure Draft regarding the calculation of interest revenue and remeasurement of the lease receivable and tentatively decided to carry these provisions forward. Consistent with the Board’s tentative modifications to the lessee remeasurement guidance, the Board tentatively decided to add a remeasurement criterion for when a contingency is resolved at a later date such that variable payments become fixed. The Board also tentatively decided to make additional modifications to paragraphs 42 and 43 to conform with modifications tentatively made to the lessee remeasurement guidance, and to provide related edits to the explanations in paragraph B34. In addition, the Board tentatively decided to modify the language in paragraphs 42 and 43 (and in related lessee remeasurement guidance) to clarify that assessment of the need to remeasure is based on the effects of the collective changes since the previous measurement.

The Board then discussed the provisions in the Exposure Draft regarding the reporting of a deferred inflow of resources and tentatively decided to carry them forward with a minor technical modification.

The Board next discussed and tentatively decided to carry forward the provisions regarding lessor reporting of the underlying asset and to add an explanation in the Basis for Conclusions that asset retirement obligations related to the underlying asset are addressed by Statement 83.

The Board next tentatively agreed to carry forward the provision that lessors not apply the recognition and measurement provisions to leases of assets that are investments.

In response to respondent comments, the Board considered a potential exception to the lessor recognition and measurement guidance for nonaviation leases at airports, such as concession leases. The Board tentatively agreed that an exception is not appropriate.

In addition, the Board tentatively agreed to carry forward the provisions for reporting in governmental funds, with a minor technical modification. The Board also tentatively decided to modify the language in the Basis for Conclusions to clarify that a lease receivable is reported at its full amount in governmental funds regardless of whether amounts are available.

Next, the Board discussed the lessor disclosure requirements. The Board tentatively agreed that the lessor disclosure requirements should be carried forward. The Board tentatively agreed that additional disclosures regarding the existence of renewal and termination options is not needed. Lastly, the Board tentatively agreed to modify paragraph 49c to clarify the nature of the disclosure.
The Board also discussed the notion of symmetry between the proposed accounting guidance for lessees and lessors. The Board members tentatively agreed that symmetry between lessee and lessor accounting continued to be an important consideration that should be carried forward.

Minutes of Meetings, October 25-27, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the following topics: the lessee model, contracts that are treated as financed purchases, leases with purchase options, and lessee disclosure requirements.

The Board tentatively agreed to carry forward the provision that the lease liability and intangible right-to-use lease asset be recognized at the beginning of the lease term. The Board redeliberated on the provisions for the initial measurement of the lease liability, including comments received from some respondents to the Exposure Draft regarding lease incentives. The Board tentatively agreed to carry forward, without amendment, the provisions for initial measurement of the lease liability.

The Board next discussed the provisions in paragraphs 17 and 18 of the Exposure Draft for discounting of the lease liability. The Board tentatively agreed to carry forward the provision for discounting the lease liability. The Board also tentatively agreed to remove the discussion from paragraph B32 of the Exposure Draft that some may consider to be guidance relating to discounting.

The Board next redeliberated the criteria for remeasurement of the lease liability and tentatively decided to carry them forward. In response to respondent comments, the Board tentatively decided to provide edits that clarify, among other things, that the changes identified in paragraph 19 and 21 are not lease modifications and that the significance of the changes should be considered both individually and in the aggregate. The Board also tentatively decided to add a remeasurement criterion for when a contingency is resolved at a later date, after which variable payments become fixed.

The Board then discussed the provisions regarding the lease asset, specifically addressing respondent comments concerning the treatment of leasehold improvements and the amortization of the lease asset. The Board tentatively decided to add lessor-provided leasehold improvements as an example of a lease incentive in the Basis for Conclusions and to clarify that interest and amortization expense are to be reported separately. In addition, the Board tentatively agreed to carry forward the provisions for reporting in governmental funds with clarifying edits.

The Board also discussed contracts that transfer ownership. The Board tentatively agreed to carry forward the provision, with clarifying edits, that contracts that transfer ownership be reported as financed purchases or sales of the asset. The Board tentatively agreed not to include further guidance on this topic in the final Leases Statement. The Board also reaffirmed its prior tentative decision that leases containing purchase options that the lessee is reasonably certain of exercising should be treated as a lease, not as a financed purchase or sale.

Next, the Board discussed the lessee disclosure requirements. The Board tentatively agreed not to provide guidance regarding where to place and how to structure lease disclosures in the notes to the financial statements, including commitments under leases that have not yet begun. The Board noted that preparers should continue to use professional judgment to determine how to present the proposed disclosure requirements in a manner that is useful and understandable to users. The Board also tentatively agreed that the lessee disclosures should be carried forward to the final Statement. The Board tentatively agreed that the disclosures should not be amended to specifically address concerns regarding impacts on competitive advantage. Additionally, the Board tentatively agreed that a statement of objectives for the notes was not essential and that additional disclosures were not needed. Lastly, the Board also tentatively agreed to modify paragraph 31a(2) to limit its applicability to residual value guarantees not included in the lease liability, parallel to the requirement in paragraph 31a(1).

Minutes of Meetings, September 13-15, 2016

The Board continued redeliberations on the proposals in the Exposure Draft, Leases, discussing the foundational principle, the classification of cash flows related to a lease transaction, and the definition of a short-term lease.

The Board redeliberated the foundational principle of the proposed leases guidance that leases within its scope are financings of the right to use an underlying asset. After considering respondent comments, the Board tentatively agreed that the foundational principle should be carried forward to the final Statement.

The Board next discussed the classification of cash flows related to leases. In response to informal feedback and comments made at the public hearing, the Board tentatively decided to amend paragraph 13 of the Exposure Draft to explicitly state that a lessee’s intangible right-to-use lease asset is a capital asset. The Board also tentatively decided that guidance on the reporting of leases in the statement of cash flows should not be included in the Standards section of the final Statement. However, the Board did not object to including conforming amendments to Question 2.27.5 of Implementation Guide 2015-1 in the codification instructions of the final Statement. This question had been proposed for deletion through the Exposure Draft’s codification instructions, but, with the proposed amendments, it would address the categorization of the cash flows among operating, noncapital financing, and capital and related financing activities.

During the discussion regarding the short-term lease exception, the Board tentatively agreed to carry forward the concept of “maximum possible term” in the definition of a short-term lease. The Board also tentatively decided that lessee-only cancelation options should not affect the determination of the maximum possible term. Therefore, the Board tentatively decided to delete the third sentence of paragraph 60 of the Exposure Draft, which proposed a different notion of maximum possible term for leases cancelable only by the lessee. The Board also tentatively decided to carry forward the maximum possible term provision for a short-term lease—12 months or less. Finally, the Board considered clarifying edits to the short-term leases reporting guidance in paragraphs 61 and 62 of the Exposure Draft and tentatively approved edits so that the guidance would state what should be reported rather than what should not be reported.

Minutes of Meetings, August 10-12, 2016

The Board started redeliberations on the proposals in the Exposure Draft, Leases, commencing with the following topics: the definition of a lease, the scope of the leases guidance, and the lease term. The Board tentatively concluded that further guidance is not needed to clarify that the right-to-use asset is an intangible asset. The Board also tentatively concluded that further guidance is not needed on the degree of formality needed for a lease contract.

The Board next considered respondent comments about power purchase agreements, grazing and hunting rights, and land use agreements for farming, and tentatively agreed that explicitly mentioning the notion of control in the definition of a lease could help in determining situations in which contractual arrangements meet the definition of a lease. In further consideration of respondent comments about the definition of a lease, the Board tentatively decided to specifically note that the right to use a nonfinancial asset refers to the right to use another entity’s underlying asset. Thus, the definition of a lease would refer to “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset)” (emphasis added). The Board also tentatively decided that the right-to-use asset should be what is “specified in the contract,” which would include the right to use the underlying asset for portions of time during a lease term, such as leases for certain days each week or for certain hours each day.

The Board also tentatively agreed to add guidance for determining when a lease contract conveys control of the right to use the underlying asset. The guidance would be similar to the FASB guidance but would be based on the notions of control found in Concepts Statement No. 4, Elements of Financial Statements, including (1) the right to obtain the present service capacity from use of the underlying asset and (2) the right to determine the nature and manner of use of the underlying asset. The control criteria would be applied to the right-to-use asset as specified in the contract. The Board tentatively agreed that the criteria would not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.

The Board tentatively agreed to specifically exclude all supply contracts (such as power purchase agreements) from the scope of the leases guidance. In further considering hunting and grazing rights, the Board tentatively agreed that no additional guidance in the final Statement was considered necessary. With reference to comments about substantive rights of substitution, the Board tentatively agreed that the definition of a lease does not need to explicitly state that the asset be identified. The Board also tentatively agreed that additional guidance for determining when a substantive right of substitution exists was not considered necessary in the final Statement.

The Board next discussed issues primarily related to the scope of the guidance and tentatively decided not to add infrastructure as an example of a nonfinancial asset. The Board tentatively agreed to add inventory to the scope exclusions in the final Statement. The Board tentatively concluded that historical works of art and assets under construction should not be excluded from the scope of the leases guidance. The Board also tentatively reaffirmed that the following should not be excluded from the scope of the final Statement: leases of assets that are investments, certain regulated leases, and short-term leases.

The Board tentatively concluded that no further guidance was necessary for determining whether cell phone tower and antenna placement agreements are leases.

The Board tentatively decided to add “living plants, and living animals” after timber as examples of biological assets rather than defining that term. The Board next tentatively agreed that additional guidance for contracts that involve both software and hardware and for contracts for cloud services and hosting services was not necessary at this time.

The Board tentatively agreed to not provide a quantitative threshold exception for lower value leases in the final Statement.

The Board tentatively agreed to supersede paragraphs 221, 225, 239, 240, and 254 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and incorporate them into the final Statement. The Board also tentatively decided that leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor should be excluded from the scope of the final Statement.

During the discussion regarding the lease term, the Board tentatively agreed to carry forward the requirement to include lessee renewal and termination options when assessing the lease term at the beginning of a lease. The Board also tentatively agreed that lessor-only options to extend (or not to terminate) the lease should be included in the lease term assessment. Lessees and lessors would be required to evaluate lessor-only options in the same manner as other options, based on whether it is reasonably certain that the option will be exercised.

The Board tentatively agreed to provide examples of cancelable periods and additional clarifying guidance in the text of the standard. The Board also considered comments on the probability threshold of reasonably certain used in evaluating the likelihood of an option being exercised and tentatively decided to carry that threshold forward. The Board tentatively agreed that no additional guidance is needed with respect to fiscal funding or cancellation clauses and nonpayment issues.

The Board tentatively decided to carry forward the lease term reassessment criteria from the Exposure Draft to the final Statement. The Board also tentatively decided to add the following criterion to the lease term reassessment criteria: “an event specified in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term.”

Minutes Archive

Leases—Tentative Board Decisions to Date


Statement No. 87, Leases, was approved in June 2017.