Countdown to Implementation:
Preparing for the Leasing Guidance

Statement No. 87, Leases, issued in June 2017, significantly changes the reporting of leases by governments.  With an effective date for reporting periods beginning after December 15, 2019, and earlier application encouraged, it is time to begin planning for implementation.  As described below, several aspects of Statement 87 could impact governments’ planning now.
As described below, several aspects of Statement 87 could impact governments’ planning now.
 

Debt Limits and Bond Covenants


The new lease reporting model requires leases to be reported as financing transactions.  Accordingly, governments that lease assets from others (lessees) will report liabilities for all of their leases of land, buildings, and equipment (except for short-term leases and contracts that transfer ownership). This includes leases that previously were considered operating leases and, therefore, were not reported as liabilities.  In addition, all lease liabilities under Statement 87 will be disclosed in the schedule of changes in long-term liabilities. 

Governments will need to review state and local laws and agreements to determine whether reporting liabilities for leases would impact the governments’ compliance with debt limitations and bond covenants.  Although the Board is expected in a forthcoming Statement to exclude lease liabilities from being considered “debt” for the purposes of disclosure, that may or may not affect interpretation of debt limitations and bond covenants.
With all leases under Statement 87 being considered financing transactions, governments will need to consider changes to policies and procedures for tracking and reporting leases both as lessees and lessors.
 

Lease Policies and Procedures


With all leases under Statement 87 being considered financing transactions, governments will need to consider changes to policies and procedures for tracking and reporting leases both as lessees and lessors.  For example, departments that initiate lease agreements may need to better document lease terms, options, and payment provisions, and communicate those factors to the accounting department for proper lease reporting.  When there is a change in a lease term, estimated lease payment amounts, or other components of lease agreements, such information may need to be communicated to the accounting staff in a timely manner because it may affect the amounts reported in the financial statements.

In addition, because lessees will report intangible assets for the right to use the leased assets, governments will need to apply their capitalization policies as part of this process.
 

Transition Provisions


Statement 87, paragraph 94 states, “Leases should be recognized and measured using the facts and circumstances that existed at the beginning of the period of implementation.”  For lessor governments’ existing sales-type or direct-financing leases, it also states, “Any residual assets for those leases should become the carrying values of the underlying assets.”  Thus, governments need to assess their leases no later than January 1, 2020, in order to implement the standards for the fiscal year ending December 31, 2020, or no later than July 1, 2020, to implement for the fiscal year ending June 30, 2021.  This assessment may require that accounting policy and procedure changes be in place by the beginning of the period of implementation.

More information about the leases standards is available on the GASB website.