When Is GASB 87 Effective for Lease Accounting?

Governmental Accounting Standards Board (GASB) Statement No. 87, known as GASB 87, significantly changes how state and local governments account for leases. This standard aims to improve financial statement clarity and usefulness by bringing lease obligations onto the balance sheet. By recognizing previously unreported lease assets and liabilities, GASB 87 provides a more comprehensive view of a government’s financial commitments. It also enhances comparability among different governmental entities.

Original Effective Dates and Deferrals

GASB Statement No. 87 was initially issued in June 2017, with an original effective date for fiscal years beginning after December 15, 2019. This meant many state and local governments would have implemented the standard by July 1, 2020. However, the COVID-19 pandemic caused widespread operational disruptions, making implementation challenging.

In response, GASB issued Statement No. 95 in May 2020, delaying GASB 87’s effective date by 18 months. The new effective date became fiscal years beginning after June 15, 2021.

For entities with a July 1 fiscal year, this shifted implementation to July 1, 2021, meaning financial statements adhered to GASB 87 for the fiscal year ending June 30, 2022. Governments presenting comparative financial statements must restate prior periods as if GASB 87 had been in effect, if practicable, ensuring consistency.

Core Accounting Changes for Leases

GASB 87 redefines how governmental entities account for leases, moving away from the “operating” and “capital” lease distinction. The standard establishes a single model based on leases as financings of the right to use an underlying nonfinancial asset. A lease is defined as a contract conveying control of the right to use another entity’s nonfinancial asset (e.g., buildings, land, vehicles, equipment) for a specified period in an exchange transaction.

For lessees, the most significant change involves recognizing a lease liability and an intangible right-to-use (RTU) lease asset on financial statements at lease commencement. The lease liability is measured at the present value of expected payments. The RTU asset is initially measured at the lease liability amount, adjusted for payments to the lessor and certain direct costs. This RTU asset is then amortized over the shorter of the lease term or the underlying asset’s useful life. The lease liability is reduced as payments are made, with an interest component recognized.

For lessors, GASB 87 requires recognizing a lease receivable and a deferred inflow of resources at the start of the lease term. The lease receivable is measured at the present value of expected lease payments. The deferred inflow represents the lessor’s right to receive future payments and is recognized systematically as revenue over the lease term. Lessors do not derecognize the underlying asset and continue to depreciate it, unlike prior standards for capital leases.

Affected Entities and General Implications

GASB 87 applies to a broad range of state and local governmental entities in the United States that prepare financial statements under GASB standards. This includes general purpose governments, public benefit corporations, public employee retirement systems, public utilities, public hospitals, and public colleges and universities.

The adoption of GASB 87 primarily increases assets and liabilities on the balance sheet due to recognizing RTU assets and lease liabilities for nearly all leases, including those previously classified as operating leases. This enhanced transparency provides a more complete picture of an entity’s financial obligations. While the overall net position may not be significantly affected initially, increased asset and liability balances can alter financial ratios. The standard also introduces new disclosure requirements in financial statement notes, including descriptions of leasing arrangements, lease assets, and future lease payment schedules.

Key Implementation Steps

Implementing GASB 87 requires governmental entities to undertake several preparatory actions. A foundational step is a comprehensive inventory of all existing contracts, not just explicit leases, to identify “embedded leases.” These are components within broader service or supply contracts that convey the right to use a specific nonfinancial asset. Examples include data hosting, transportation, and maintenance agreements.

Once identified, each contract must be reviewed to determine if it meets the GASB 87 lease definition and to gather relevant data. This data typically includes lease terms, payment schedules, and discount rates for present value calculations. Entities must assess whether options to extend or terminate leases are reasonably certain to be exercised, as this impacts the recognized lease term.

Updating existing software systems is also important, as current accounting software may not handle the new recognition and measurement requirements for RTU assets and lease liabilities. Training personnel on GASB 87’s definitions, calculation methodologies, and disclosure requirements is necessary for accurate compliance. This ensures all applicable contracts are properly accounted for.