Later this month, the GASB is scheduled to issue new standards on lease accounting. As many of you know, leasing is an important activity for many state and local governments across the United States. It can be a financing option for obtaining access to certain necessary items—including vehicles, heavy equipment, and buildings—without having to buy them outright.
Through the forthcoming leasing guidance, the Board is seeking to align the accounting and financial reporting of lease transactions more closely with their economic substance. The guidance will be based on the underlying principle that leases are financings of the right to use an underlying asset for a period of time. It will eliminate the current distinction between operating and capital leases by treating all leases as financings.
Board deliberations in the leases project were informed by private-sector lease requirements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which recently reexamined their leases standards.
WHY NEW GUIDANCE WAS NEEDED
The Board initiated the project because the current leasing guidance predates the GASB and doesn’t take the conceptual framework into consideration—including the definitions of assets and liabilities. Moreover, the existing lease standards allow a lease to be structured in a manner that avoids reporting the economic substance of the transaction. That is, a long-term liability and related asset were not reported as a result of the lease transaction.
LEASE DEFINITION
The definition of a lease will change under the new guidance. The definition focuses on a contract that conveys control of the right to use another entity’s non-financial asset, which will be referred to in the new Statement as the underlying asset.
LEASE TERM
The lease term is the period during which the lessee has a noncancelable right to use an underlying asset, adjusted for certain options to extend or terminate the lease.
SHORT-TERM LEASES EXCEPTION
The standard provides an exception for short-term leases, which are lease that, at their beginning, have a maximum possible term of 12 months or less. These leases are recognized based on the payment provisions of the contract.
LESSEE ACCOUNTING
Lessee governments—that is, governments that pay to use another entity’s capital asset (the underlying asset) for a given period—will report the following about their leases (except for short-term leases):
- An intangible lease asset that represents the government’s right to use the underlying asset
- A corresponding lease liability
- Amortization expense from using up the lease asset during the lease, and
- Periodic interest expense on the lease liability.
LESSOR ACCOUNTING
Lessor governments—that is, governments that lease their capital assets to others—will report the following about their leases:
- A receivable for the right to receive payments
- A corresponding deferred inflow of resources
- Lease revenue, reported systematically over the lease term, and
- Periodic interest revenue from the receivable.
EFFECTIVE DATE AND TRANSITION
The requirements of the leasing guidance are to be effective for reporting periods beginning after December 15, 2019, with earlier application encouraged.