GASB 87 Exclusions From Lease Accounting
Understand the specific arrangements excluded from GASB 87's lease accounting model to ensure accurate government financial reporting and compliance.
The Governmental Accounting Standards Board (GASB) Statement 87 establishes a single model for lease accounting, changing how governments report these arrangements. The objective is to increase financial statement transparency by recognizing leases as financings of the right to use an asset. This requires government entities to report a lease liability and a corresponding intangible right-to-use lease asset for most leases. The standard also carves out several specific exceptions and exclusions.
Defining a Lease Under GASB 87
A contract must meet the specific definition of a lease to fall under GASB 87. A lease is a contract that conveys control of the right to use another entity’s nonfinancial asset for a period of time in an exchange transaction. This definition hinges on two components: the government’s control over the asset’s use and the asset being identifiable. If an arrangement does not satisfy both conditions, it is excluded from the standard’s requirements.
Control is composed of two elements. First, the government must have the right to obtain the present service capacity from the asset’s use. Second, the government must possess the right to determine the nature and manner of the asset’s use. For example, if a city contracts for the exclusive use of a building for five years and can decide how the space is configured and utilized for public services, it likely has control.
An asset must also be explicitly or implicitly identified in the contract. This involves substantive substitution rights. If a supplier has a practical and economic right to substitute the specified asset with another throughout the lease term, the asset is not considered identifiable, and the contract is not a lease. However, if the supplier can only replace the asset with an identical one, this does not negate the existence of a lease.
The Short-Term Lease Exclusion
One of the main exclusions from GASB 87’s accounting requirements is for short-term leases. This allows governments to avoid recognizing a right-to-use asset and lease liability for leases with a brief duration, reducing implementation complexity.
A short-term lease is defined as a lease that, at its commencement, has a maximum possible term of 12 months or less. This calculation must include any options to extend the lease, regardless of how probable it is that the option will be exercised. For instance, a six-month lease that includes an option for the lessee to extend it for another 12 months has a maximum possible term of 18 months and would not qualify as a short-term lease.
For these excluded leases, instead of recording an asset and liability, lessees recognize payments as expenses, and lessors recognize payments as revenues. For rolling month-to-month leases that either party can cancel, the maximum term is the noncancelable period, including any required notice period.
Other Specific Exclusions from Scope
Beyond short-term leases, GASB 87 lists several other types of contracts that are explicitly excluded from its scope, even if they meet the general definition of a lease. These exclusions prevent the standard from overlapping with other accounting treatments or applying to specialized assets.
Contracts that transfer ownership of the underlying asset to the lessee by the end of the term are accounted for as a financed purchase by the lessee or a sale by the lessor, not as a lease. This applies when the contract is structured to transfer title and does not contain termination options.
The standard also excludes:
- Leases of certain nonfinancial assets held as investments, such as properties a government holds to earn income rather than for public services.
- Certain regulated leases, such as specific airport-airline use agreements, if the rates are regulated and reasonable.
- Leases of biological assets, such as timber, living plants, and animals.
- Leases of inventory.
Arrangements Governed by Other Standards
Some arrangements that appear similar to leases are excluded from GASB 87 because they are specifically addressed by other GASB pronouncements. This separation ensures that specialized transactions are accounted for under rules designed for their particular characteristics, avoiding conflicting guidance.
A primary example is contracts for intangible assets. The right to use assets like software, patents, and copyrights is not governed by GASB 87. Instead, many of these arrangements, particularly for software, fall under GASB Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs). GASB 96 requires governments to recognize a subscription liability and a corresponding intangible right-to-use asset, similar in concept to GASB 87 but tailored to IT subscriptions.
Public-private and public-public partnerships are another exclusion. In these arrangements, a government contracts with an operator to provide public services using a public asset. These partnerships, including Service Concession Arrangements, are accounted for under GASB Statement No. 94. Leases related to conduit debt obligations are also excluded.