Understanding the Implications of GASB 87 on Nonfinancial Assets and Leases

The Governmental Accounting Standards Board (GASB) has issued Statement No. 87, which introduces significant changes to lease accounting for government entities. One of the key implications of this standard is its definition of a nonfinancial asset and how it relates to leases.

According to GASB, a nonfinancial asset is any asset that is not cash or a financial instrument. Examples of nonfinancial assets include buildings, land, vehicles, and equipment such as copiers, heavy machinery, and hangars. When an entity enters into a lease agreement, it is essentially conveying control over the right to use another entity's nonfinancial asset for a specified period in exchange for rent or other consideration.

GASB defines a 'lease' as a contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. This definition applies to all types of leases, including operating and capital leases.

The new standard, GASB 87, replaces the previous lease accounting methodology and establishes a single model for lease accounting based on the principle that leases are a financing of the right to use an underlying asset. The standard requires recognition of certain lease assets and liabilities for all leases, including those previously classified as operating leases and recognized as income by lessors and expenditures by lessees.

The implications of GASB 87 are far-reaching, particularly for government entities with contracts that are leases or contain leases that support entity operations. Historically, operating leases have been 'off the balance sheet,' but the new standard requires all leases with terms exceeding one year to be recognized as both a 'right-of-use' asset and a lease liability on the balance sheet, with certain exceptions.

Entities must now consider lease compliance considerations such as writing new or revising existing policies, evaluating current leases, updating financial statement disclosures, and establishing procedures to maintain future calculations. This requires significant effort and resources, particularly for those entities that have previously not recognized leases as assets and liabilities on their balance sheets.

For government entities with June 30th year-ends, the implementation of GASB 87 has already begun. However, many are still in the process of accumulating all existing lease information to comply with the new standard. The key takeaway is that GASB 87 significantly impacts entities with contracts that are leases or contain leases that support entity operations and requires careful consideration of lease compliance considerations.

By understanding the implications of GASB 87 on nonfinancial assets and leases, government entities can ensure accurate and compliant financial reporting, which is critical for transparency and accountability. As such, it is essential to stay informed about the new standard and its requirements to avoid potential penalties and reputational damage.

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