The CompleteGuide to GASBLease Accounting

Table of contentsA quick look at GASB 87 . 4What is GASB 87? . 4Who is subject to GASB 87? . 4When does GASB 87 go into effect? . 5Establishing a complete lease population under GASB 87 . 5What qualifies as a lease under GASB 87? . 6What types of leases are exempt under GASB 87? . 7Identifying necessary lease information .8What lease data is needed for GASB 87? . 8Calculations, remeasurements and disclosures . 9Lease accounting calculations . 9Remeasurements . 10Disclosure reporting . 11What to look for in lease accounting software . 12Evaluating lease accounting technology . 12Conclusion . 15

This guide provides an overviewof GASB 87, so you can be betterinformed and prepared to meetthe effective date. You will learn: What qualifies (and does not qualify)as a lease under GASB 87 Lease terms you need to capture for reports How technology can help automate GASB 87reports and calculations

A quick look at GASB 87What is GASB 87?GASB Statement No. 87, Leases, or GASB 87, is a statement that outlines new requirements for lease accounting for governmental entities withsignificant impacts on financial statements.Under the current GASB guidance, including GASB 13 and GASB 62, organizations do not report operating lease agreements in their financialstatements.GASB 87 replaces the current operating and capital lease categories with a single model for lease accounting based on a new definition ofleases as contracts that convey control of the right to use a non-financial asset. The new rules require lessees to recognize a lease liability andan intangible asset while lessors are required to recognize lease receivables and a deferred inflow of resources on their financial statements.Who is subject to GASB 87?In general, GASB 87 applies to:State, local andmunicipalgovernmentsPublic benefitcorporationsand authoritiesPublic employeeretirement systemsPublic utilities,hospitals and otherhealthcare providersFurther, GASB 87 affects lease accounting and reporting for both lessees and lessors: Lessees must recognize lease liabilities and intangible right of use (ROU) lease assets on their statements. Lessors must recognize lease receivables and deferred inflows of resources on their financial statements.Public collegesand universities

When does GASB 87 go into effect?In response to the impact of the COVID-19 pandemic, the GASBissued Statement No.95, Postponement of the Effective Dates of CertainAuthoritative Guidance, which delayed the GASB 87 effective date by18 months.Organizations subject to GASB 87 must adopt the new standardfor fiscal periods beginning after June 15, 2021. However, GASBencourages organizations to apply the standard as soon as possible.Further, the GASB requirement to apply the standard retroactively byrestating financial statements “if practicable” for all prior periods presentedremains. Due to this requirement, organizations subject to GASB 87 shouldbe prepared to facilitate compliance for the fiscal period prior to adoption.Establishing a complete lease population under GASB 87Adopting the new standards is a massive administrative lift. It requires you to take on new internal procedures, cross-functional collaboration,education and comprehensive controls.The most time-consuming part of the process is often gathering all leases and surfacing critical data. Leases are complex, constantly evolvinglegal agreements often scattered across an organization. From sourcing, to signature, to sunsetting, there are many stakeholders involved inlease management – both internal and external – often using different systems, formats and procedures.This makes tracking down leases a time-consuming and challenging process for many organizations. It requires careful planning, communicationand collaboration across the organization.After all leases are identified, you must determine which are required under GASB 87 to appear in your financial statements.

What qualifies as a lease under GASB 87?GASB 87 defines a lease as a contract that conveys the right to use another entity’s nonfinancial asset for a period of time, including both: The ability to obtain the present use of the asset as specified in the contract The right to control how the underlying asset is usedThe new rules require all agreements that meet that definition be classified as a finance lease and recognized in the financial statements.Examples of lease asset typesTypically, leased assets recorded under GASB 87 may include:Equipment forday-to-day operationsVehiclesReal estate Office equipment Medical equipment Telecommunications equipment IT equipment Energy infrastructure equipment Automobiles Vans Trucks Specialized vehicles neededby the organization Property Buildings Offices Warehouses Flex spaces Land leases

What kinds of leases are exempt under GASB 87?There’s a long list of exemptions, including: Leases of certain types of intangible assets, such as patents and software licenses,and the rights to explore for or exploit natural resources such as oil, gas, mineralsand similar nonrenewable resources Leases of biological assets, including timber, living plants and living animals Leases of inventory Service concession agreements Supply contracts, as long as they do not convey the right to use the underlying asset Leases in which the ownership of the asset is transferredIn addition, some leases have exceptions within GASB 87, meaning there is a separateguidance to follow under the standard. These include:GASB 87 - Specific Exemption:Leases in which the ownershipof the asset is transferredThis means if the contract transfersownership, it’s treated as a financingtransaction and not a lease at all.This exemption is specific and uniqueto GASB 87. Under other leaseaccounting standards (ASC 842/IFRS16), it is still considered a lease.Short-term leasesShort-team leases require specific treatment under GASB 87. A short-term lease is definedas a contract that, at the commencement of the lease, has a maximum possible term of12 months or less, including any options to extend, regardless of their probability of beingexercised. Under GASB 87, lessees recognize short-term lease payments as outflows ofresources (for example, expenses) based on the payment provisions of the lease. Lessors recognize short-term lease payments as inflows of resources(for example, revenues) based on the payment provisions of the lease.Regulated leasesRegulated leases require special treatment under GASB 87. A regulated lease occurswhere there are external laws, regulations or legal rulings that apply to how a contractcan be structured and what fees can be changed.Disclosure of regulated leases is required under GASB 87.

Identifying necessary lease informationGASB 87 requires visibility into specific information within your leases. Therefore, leases must beclosely examined to pull out all the data points required for lease calculations and disclosures.Because leases are complex and often lengthy documents, it can be difficult to properly identify allthe specific information needed for GASB 87 lease accounting.What lease data is needed for GASB 87?At a high level, you need to collect and track the following information from allGASB 87-qualified leases to produce accurate lease accounting reports: Lease terms Discount rate Rent payment amounts and dates Lease option terms, including renewal, purchase or cancelation options Variable or percentage rent terms Residual value guarantee termsOther lease costs to track:Initial direct costs —any structuring fees, third-partylegal fees or administrative costsmust be accounted for in the initialmeasurement of lease assetsEnd of lease obligations —the estimated, discounted value ofthe obligation to be paid in the eventof early termination or the cost topurchase or restore the assetVariable components —the variable expenses that must betracked and disclosed separately fromthe lease asset or liabilityDepending on your accounting methods and decisions, you may need to break up leasepayments into components — separating out the amounts for rent from other costs such ascommon area maintenance (CAM) charges, taxes and insurance.Further, it’s important to remember thatleases are dynamic, and the options,terms, and clauses within change. Underthe new standards, any modification dueto the reassessment of lease terms mustbe reflected in the financial statements.Need help planning for GASB 87?The Lease Accounting Milestone Planner is a custom planning tool that maps outyour plan for GASB 87 compliance.These lease data pointsmake it possible to: Calculate the lease liability andlease asset (as the lessee) Calculate the receivable/deferredinflow (as the lessor) Generate necessary disclosurereporting

Calculations, remeasurements and disclosuresLease accounting calculationsLease accounting for lesseesUnder GASB 87, lessees must recognize a lease liability and a right to use asset for allqualified leases. The lease liability is generally calculated as the present value of payments thelessee expects to make during the lease term, including any contract renewaloptions the lessee is reasonably certain to exercise. The lease asset is calculated as the lease liability plus any prepayments or initialdirect costs, minus any lease incentives at or before commencement of the lease.As payments are made on the lease, the liability amount is reduced and interest expensesare recognized. The asset is amortized over the length of the lease term or over the life ofthe asset (whichever is shorter).Lease accounting for lessorsUnder GASB 87, lessors must recognize a lease receivable and a deferred inflow of resourceson the financial statements. Just as with lessee schedules, the calculations can be complex. At the start of the contract, the lease receivable is generally calculatedas the present value of lease payments the lessor expects to receiveover the term of the lease, minus any provision for estimated uncollectible amounts. The deferred inflow is calculated as the lease receivable plusany payments made at or prior to the commencement of thelease.As the lessor receives payments, the lease receivable amount isreduced and interest revenue is recognized. The deferred inflowcontinues to be recognized as revenue over the life of a lease.

RemeasurementsOrganizations must remeasure the value of lease assets and liabilities when there is some significant event or material change in circumstances thatis within their control, including: Modification of a lease term, size or payment obligations — for example, the extension or expansion of a lease or the exercising of alease option Lease contraction due to full or partial lease termination or abandonment — for example, when an abandoned space is sublet, causingthe abandonment of the primary asset The full or partial impairment of a lease Changes in variables such as the Consumer Price Index (CPI) or borrowing ratesRemeasurement typeDescriptionModificationAny modification of lease term (i.e., change in payment term, extension of lease term, etc.)Full ImpairmentDue to some event, the asset no longer has any value, but the organization still has obligationunder the lease.Partial ImpairmentDue to some event, the asset still has a value, but the value has been reduced by some amountor percentage.Full TerminationA lessee has ended the lease contract and no longer has the lease liability or asset on the books.Partial TerminationA lessee reduces the use of some portion of the asset (e.g., reduces total square footage of leaseby terminating some portion), which reduces the amount of liability or asset on the books.Full AbandonmentA lessee decides to no longer use the entire asset as of some specific date; the lease contract isstill in place and the asset remains as a liability on the financial statement.Partial AbandonmentA lessee decides to no longer use a portion of the asset as of some specific date; the assetremains as a liability on the financial statement.

Disclosure ReportingFor both lessees and lessors, GASB 87 now requires disclosure reports that provideaggregated totals and detailed supporting data such as: Qualitative and quantitative information about leases, including variablepayments not included in measurement of liability Significant assumptions and judgments made when measuring leases The amounts recognized in financial statementsThese new standards require organizations to gather and manage substantial amountsof data to generate disclosure reports related to real estate, equipment, vehicles, landand any other leases an organization holds.Lessee disclosure reports must provide: Fully detailed lease descriptions Amount of total leased assets — both gross and net figures Future lease payment schedules, including interest paymentsLessor disclosure reports must provide: General descriptions of all lease arrangements Inflows of resources, including lease and interest revenue recognized in thereporting period Revenue from variable payment components not included in the leasereceivableIn addition, regulated leases have different disclosure requirements than otherleases. For example, rather than reporting a receivable, lessors with regulatedleases must disclose a schedule of expected future minimum payments.

What to look for in lease accounting softwareSpreadsheets aren’t designed to handle the dynamics and complexity that impact the accounting calculations -- lease transactions can result inhundreds of permutations and calculations.Most likely your current lease process has gaps that will need to be addressed when moving to adopt GASB 87. Many of these gaps can beaddressed through the use of technology.Lease accounting software can help you meet GASB 87 requirements and maintain compliance beyond the initial reporting period.Evaluating lease accounting technologyThe right lease accounting software solution provides you with the proper tools to manage lease data and changes, perform the necessarycalculations and generate reports according to GASB standards. In addition, choosing lease accounting and management software that hasthe capabilities described below will help to further streamline the accounting process and ensure ongoing GASB compliance.Lessee and lessor accountingLease amortization scheduleDisclosure reporting capabilitiesRoll-forward reportingAutomated calculationsHandling for regulated leasesJournal entriesHandling for short-term leasesOngoing compliance viamodification, impairment,termination capabilitiesCompliance starts with a lease subledgerGASB 87 introduces a much higher level of scrutiny. Now, organizations have significantly more lease information to track, update,calculate and report on. Given the cross-functional, complex and evolving nature of lease language, any lease accounting solution should startwith a strong lease management software to act as a single system of record for all lease data and lease financials.

Any sustainable solution should offer: Configurable tools to handle any lease scenario across any asset typeto maintain a reliable, up-to-date source for qualitative lease detailssuch as terms, changes and dates Integration capabilities to other cross-functional systems to maintaina single source of truth Defined user roles for anyone that touches leases and integratedguardrails to ensure any changes are in accordance with internalaccounting procedures A comprehensive audit trail to track and reconcile any changesThe right lease accounting and management software helps youcapture all the necessary data, track changes and report lease costsin accordance with internal accounting policies and procedures aswell as the GASB 87 lease accounting standard.

Automated calculationsFurther, a lease software solution helps to streamlines this very complexprocess by providing automated calculations and workflows to: Ensure that leases and the related assets, liabilities, revenuesand expenses are accounted for consistently Eliminate human error and reliance on formulas andcumbersome spreadsheets Ensure accuracy by having all data and calculations in one system Integrate leases and their pertinent data, such as liabilities, leaseassets, interest expenses and revenue inflows, to the financial statements Automatically generate journal entries and lease amortization schedules using the system dataLease reassessments and remeasurementsWith the enhanced level of lease visibility that GASB 87 requires, an organization’s leaseaccounting must explain all lease changes on the financial statements. This includesadditions or subtractions due to new leases, modifications, impairmentsand terminations, as well as regular amortization.Accounting for lease remeasurement and reassessments is a common roadblock tosustainable compliance as accounting teams must rely on cross-functional stakeholdersadhering to internal procedures as they manage lease modifications.Using lease technology to organize, update and manage lease data allows you tointegrate lease renewals and other modifications into your accounting process,ensuring they are captured accurately and reported in a timely manner.Roll-forward reports are a valuable tool for meeting this requirement, providing adetailed disclosure of lease financials including period over period changes to leaseassets and liabilities.By choosing a technology platform that automates roll-forward reporting, yourorganization can streamline data gathering, calculations and reporting whileensuring that the process meets compliance and disclosure requirements.

Alerts, approvals, internal controls and audit trailsGiven the cross-functional nature of lease management, defined user roles and alerts and comprehensiveapprovals hierarchies are critical to maintaining a single source of truth.Look for systems that can streamline cross-functional workflows both internally and externally, with projectmanagement systems that can notify appropriate stakeholders when upcoming critical dates are near.However, auditability cannot be compromised. Approvals hierarchies are important to make sure thatmistakes – or intentional malfeasance – aren’t reflected on financial statements, and audit trails must bemaintained to track every change.ConclusionMany organizations today are challenged to understanding the extent of their lease portfolio, the data they need for lease measurements, thelatest accounting methodology and how to stay on top of any lease account changes.By offering a centralized view into all of an organization’s leases, lease accounting and management software can streamline the process oforganizing the lease portfolio and understanding how this information needs to be reported on financial statements.For organizations that are impacted by GASB 87 lease accounting requirements, a lease software solution such as Visual Lease provides all thecapabilities necessary for achieving compliance, streamlining reporting and strategically maintaining a lease portfolio.In addition to meeting the financial reporting and compliance requirements for GASB 87 (and other leading lease accounting standards), VisualLease provides the tools for managing ongoing lease changes in one centralized and intuitive solution designed to meet lease accounting needsfor the long term.About The Visual Lease Data InstituteThe Visual Lease Data Institute is a collection of market-leading data, trends and insights on lease accounting, management and optimization created and curated by Visual Lease,provider of the #1 lease optimization software. The Institute was founded on 35 years’ experience managing lease data and financials, and was created to arm organizationswith the knowledge required to achieve and maintain lease accounting compliance and leverage their leases as strategic business assets.

Further, GASB 87 affects lease accounting and reporting for both lessees and lessors: Lessees must recognize lease liabilities and intangible right of use (ROU) lease assets on their statements. Lessors must recognize lease receivables and deferred inflows of resources on their financial statements. State, local and municipal governments