ACCOUNTING FOR
LEASES: GASB 87
2021 WASBO Annual Conference
Presenter Information
Name: Holly Burlingame
Title: CSBA WASBO Instructor
Organization: WASBO
Email:
hollyburlingame@gmail.com
Presenter
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Presenter Information
Name: Ryan Montgomery
Title: Assistant Audit Manager
Organization: SAO
Email:
[email protected]a.gov
Presenter
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Presenter Information
Name: Paul Stone
Title: Supervisor, Accounting
Organization: OSPI
Email: paul[email protected]
Presenter
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GASB 87 Accounting for Leases
Today’s Topics
• Prepare for Lease Accounting
• Definitions
• Types of Leases
• Cash Basis Accounting and Reporting
• Modified Accrual Accounting for Leases
• The Interest Rate
• Illustrated Example for Modified Accrual Lease Accounting
Prepare for Lease Accounting
• GASB 87 guidance becomes effective: September 1, 2021
• This is for the 2021-22 School Year.
• The guidance applies retroactively to all your leases.
• Operating and capital leases will become:
Leases or Leases With Option to Purchase
Prepare for Lease Accounting
• It is highly recommended that school districts PREPARE NOW
for new lease accounting.
• Identify leases and contracts which apply.
• Create a list for review.
• Document key provisions:
• Such as the lease term, extensions, termination
provisions, payment provisions, and an implied interest
rate.
Prepare for Lease Accounting
Just because the word “lease” isn’t in the agreement, doesn’t
mean it doesn’t meet the definition of a lease under GASB 87.
And not all “leases” meet the definition of the new standard.
It’s the substance of the agreement that you must analyze – and
document.
GASB 87 Lease Types
• Accounting treatment depends upon the Lease Type:
1. Short-Term Leases
2. Contracts that Transfer Ownership
3. The Single-Model Approach
Definitions
A Lease:
• “A lease is defined 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.”
Definitions
Right to Use:
• The right to obtain the present service capacity from use of the
underlying asset and the right to determine the nature and manner
of its use.
• Right to use an asset for a specified period of time.
• The right to use does not mean uninterrupted access.
• One lessee may have a multi-year, facility use agreement for a
room 3 days a week; while another lessee uses the same room one
day a week.
Definitions
Lease Term:
• The period during which a lessee has a non-cancelable right to
use an underlying asset.
• Plus periods covered by the lease and periods covered by the lessee’s
or lessor’s option to terminate the lease.
• Fiscal funding/cancelation clauses are ignored unless
reasonably certain to be exercised.
Definitions
Exclusions:
• Certain activities are excluded from lease guidelines under GASB
87.
• Intangible Assets – Such as Patents and Software
• There are Exceptions to the Exclusions
• Biological Assets – Such as Timber
• Service Concession Arrangements
• Supply Contracts
• Subscription-Based Information Technology Arrangements
• (SBITAs) GASB 96 Coming Soon
Definitions
Lessee:
• The school district acquires the right to use another entity’s
nonfinancial asset(s) (i.e., tenant)
• Examples:
• The school district leases parking space from the county for its Bus
Fleet.
• The school district leases copiers from a vendor.
Definitions
Lessor:
• The district conveys the right to use its nonfinancial assets to
another entity (i.e., landlord).
• Examples:
• The school district leases a surplused elementary school to a
university.
• The district leases surplus land rights to a communication service
provider for a cell tower.
Short Term Leases
GASB 87 defines short-term leases entirely on the length of the
maximum possible noncancellable lease term.
• Short-term is generally defined as 12 months or less.
• A lease term of less than 12 months is not automatically a short-
term lease.
• All future options to extend are considered, regardless of
probability.
• Ref: (GASB87, Par. 16) (Implementation Guide 2019-3; 4.18)
Short Term Leases
Accounting Transactions and Financial Reporting
• Accounting treatment has not changed
• The lease payments are recorded as revenues or expenditures
based on the payment provisions of the contract.
• Short-term leases require no additional note disclosures.
Contracts that Transfer Ownership
• Formerly “Capital Leases”
• Accounted for as Purchase Contracts
• To the Lessor: These contracts are treated as a financed sale
of the asset.
• To the Lessee: These contracts are treated as a purchase of
the asset on credit.
• The contract does not contain a termination option.
Contracts that Transfer Ownership
• The contract can directly specify that ownership of the
underlying asset is transferred to the lessee by the end of the
lease.
• Accounting and reporting for contracts that transfer ownership
is the same as the single-model approach.
The Old Criteria:
Capital verses Operating Leases
• Four Criteria distinguished a Lease as Capital.
• If a lease met any of the criteria, it was a capital lease and
accounted for as a purchase contract.
• Transfers ownership by the end of the lease term.
• Contains a bargain purchase option.
• 75 percent or more of the estimated economic life.
• PV of minimum lease payments equals at least 90 percent of
the fair value of the lease property.
The Old Criteria:
Capital verses Operating Leases
• The four criteria were difficult to measure.
• Capital leases require the recognition of an other financing
source and expenditure.
• Operating Leases do not.
• GASB 87 says: we’ve had enough of that. From now
on, all lease accounting guidance will take a single
approach.
The Single-Model Approach
• All leases that do not fall into the first two categories are treated
with the
single-model approach.
• They are not Short-Term Leases.
• They are not Contracts that Transfer Ownership
• They are just “Leases”.
• The accounting treatment is the same as Contracts that
Transfer ownership.
Cash Basis Accounting – The Lessee
At the acquisition of the lease, the Cash-Basis District books the
total amount of the contractual liability: For illustration
purposes, we will create a contract for $60,000; with payments of
$1,000 per month for 5 years.
GL Sub-
Ledger
Account Title
DR CR
530 NCES
973X
Equipment X
60,000
965 Rev–9500 Long-Term
Financing
60,000
To Recognize the Acquisition of a Lease
Cash Basis Accounting – The Lessee
• A monthly payment on a lease – cash basis:
GL Sub-Ledger Account Title DR CR
530 NCES 744X Lease of X 1,000
241 n/a Warrants Outstanding 1,000
To Record the lease payments.
Cash Basis Accounting – The Lessor
Lease payments are recorded as revenue when cash is
received.
GL Sub-
Ledger
Account Title
DR CR
230 n/a Cash 1,000
960 Rev–2700 Lease Income 1,000
To Recognize Lease Revenue when received.
Cash Basis Financial Reporting
Requirement for Leases
• On the Schedule of Long-Term Liabilities (SLTL):
• Report the Year End contractual liability remaining for lease payments.
• Cash Basis: Plug your ears when we talk about Modified Accrual…
• Disclosure in the Notes to the Financials.
• We are working on a new Lease Note Template for disclosure
requirements.
• Keep information about the Description of the Contract, Monthly
Payments, and the Schedule of Payments.
Accounting For Leases
Modified Accrual Accounting
Interest Rates, Discount Rates, and
Borrowing Rates
• The terms mean the same thing… generally.
• It is the rate the lessor charges the lessee.
• The rate is often not stated in lease agreements.
• The rate must be determined; because it used to calculate the
present value (PV) of the contract.
Other Interest Rate Terminology
Stated Interest Rate:
It is an interest rate that is written into the contract.
[Got it.]
When entering into contractual obligations in the future…
request that the contract include a stated interest rate.
Other Interest Rate Terminology
• Implicit Interest Rate:
• An interest rate that is understood by the lessor and lessee to
be charged in the contract.
• If you know the Present Value, Lease Term, and Payments: The
interest rate is implicit in the lease.
Other Interest Rate Terminology
• Incremental Borrowing Rate (IBR):
• An interest rate that is an “approximation” of a rate that would
be charged in a similar transaction between similar parties.
• A known, current interest rate the school district is being
charged in other like contracts.
• Refer to other contracts that include known interest rates.
• Don’t rely on generic Bond interest rates.
Define your Interest Rates and
Present Values
• Even though GASB 87 does not take effect until next year, the
guidance applies retroactively to all your current leases.
• You must calculate the present value of a lease by applying the
interest rate in effect at the inception of the lease.
• If you entered into a lease contract on July 1, 2017, use the
interest rate in effect on that date.
• This is work you can do now; you want it out of the way.
Document Your Methodology
• Document your methods and sources used to determine the
interest rate for each lease agreement.
• Keep your work… it should be retained.
• It is advisable to have a written policy on how the district
created reasonable interest rates.
Document Your Methodology
• We have a Present Value Tool. (There is hope)
• A special thanks to our friends at Piper Sandler Companies
who understood the need and built a prototype, Present Value
Tool in Excel, for us to use.
• We hope to make the Tool available on the OSPI website soon.
An Illustration on Lease Accounting for
Modified Accrual
• In a lease, you are provided with the lease term (5 Years) and
the monthly payment amount ($1,000).
• You know the Total Contractual Lease payments to be is
$60,000.
• ($1,000 * 12 * 5 = $60,000)
• You need to create a payment spreadsheet to allocate each
payment between interest and principal.
An Illustration on Lease Accounting for
Modified Accrual
• You must have an interest rate to calculate the Present Value.
• For our illustration, we will use an annual rate of 3.0% (.03)
• 12 monthly payments, the interest rate factors as (.0025)
• (.03 / 12 = .0025)
• (.0025 is the interest rate per period.)
The Present Value Equation Illustration
• Assumptions:
• $1,000 down payment
• $1,000 per month lease payments
• 60 months
• $60,000 total
• Using the Present Value function tool in Excel.
• (You can do this now, in Excel, without the PV Tool we are
building.)
Present Value Function in Excel
=PV(rate, nper, pmt, [fv], [type])
• Rate Required. The interest rate per period
• Nper Required. The total number of payment periods in a lease.
• Pmt Required. The payment made each period and cannot change
over the life of the lease.
• Fv Optional, The future value, or a cash balance you want to
attain after the last payment is made (usually 0).
• Type Optional, The number 0 or 1 indicates when payments
are due. 0 end of the period. 1 at the beginning of the period.
Present Value Function in Excel
=PV(rate, nper, pmt, [fv], [type])
• Rate .0025 (.03/12 months = .0025)
• Nper 60 months
• Pmt Monthly payment of $1000 (Note that this is a negative number.)
• Fv Cash balance at end of lease $0
• Type 1 indicates payments at the start of the period
• The PV function in Excel is:
• =PV(.0025,60,-1000,0,1) = $55,791
Modified Accrual Accounting – The
Lessee
At the acquisition of lease, the modified accrual district calculates
and records the present value (PV) of the contractual liability:
•
Subsequent lease payments must be segregated between princip
•
al
and interest.
GL Sub-Ledger Account Title DR CR
530 NCES
973X
Equipment X
55,791
965 Rev–9500 Long-Term
Financing
55,791
To Recognize the Acquisition of a Lease
Modified Accrual Accounting – The
Lessee
Create a payment spreadsheet to allocate each payment
between interest and principal.
Formula: =CUMIPMT(.0025,60,55791.49,2,2,1)*-1
Date Payment Interest Principal Balance
55,791.49
9/1/2021
1,000.00
-
1,000.00
54,791.49
10/1/2021
1,000.00
136.98
863.02
53,928.47
11/1/2021
1,000.00
134.82
865.18
53,063.29
12/1/2021
1,000.00
132.66
867.34
52,195.95
Modified Accrual Accounting – The
Lessee
• When monthly payments are made, record an expenditure for
debt principal and interest
.
• Provide the payment schedule to you AP person.
GL Sub-Ledger Account Title DR CR
530 AA84; NCES 7832 Principal 863.02
530 AA83; NCES 7835 Interest 136.98
601 Accounts Payable 1,000.00
To Record the monthly lease payment.
Modified Accrual Accounting – The
Lessor
Lessor:
• The district conveys the right to use its nonfinancial assets to
another entity (i.e., landlord).
• Examples:
• The school district leases a surplused elementary school to
a university.
• The district leases surplus land rights to a communication
service provider for a cell tower.
Modified Accrual Accounting – The
Lessor
For F-196 Modified Accrual, a lessor should recognize the
Present Value of a lease receivable and a deferred inflow of
resources at the start of the lease term.
GL Sub-
Ledg
Account Title
DR CR
345 Leases—Receivable 55,791
755 Deferred Inflow—
Leases
55,791
To Record the Present Value of the Lease Contract at the start of the
lease term.
Modified Accrual Accounting – The
Lessor
• When monthly payments are received, record Interest Income and
the reduction of the Receivable.
• Where’s my Lease Income?
GL Sub-
Ledg
Account Title
DR CR
230 Cash 1,000.00
345 Lease—Receivable 863.02
960 Rev–2450 Other Interest Income 136.98
To Recognize the October Lease Payment Received.
Modified Accrual Accounting – The
Lessor
• Lease Income is recognized by the straight-line amortization of
Deferred Inflow—Leases: (55,791.49 / 60 months = 929.86 per
month.)
• This adjusting entry can be done monthly or annually.
GL Sub-
Ledg
Account Title
DR CR
755 Deferred Inflow—
Leases
929.86
960 Rev–
2700
Lease Income 929.86
To Recognize Lease Income and Adjust Deferred Inflows.
Modified Accrual Accounting – The
Lessor
Create a payment spreadsheet to track your lease.
Date Payment
Interest
Income
Principal
Reduction
Receivable
Balance
Lease
Income
Def’d
Inflow
55,791.49 55,791.49
9/1/21 1,000.00 - 1,000.00 54,791.49 929.86 54,861.63
10/1/21 1,000.00 136.98
863.02
53,928.47 929.86 53,931.77
11/1/21 1,000.00 134.82
865.18
53,063.29 929.86 53,001.91
12/1/21 1,000.00 132.66
867.34
52,195.95 929.86 52,072.06
Modified Accrual Financial Reporting
Requirement for Leases
• On the Schedule of Long-Term Liabilities (SLTL):
• Report the present value of the future lease principal.
• Disclosure in the Notes to the Financials.
• Working on a new Lease Note Template for disclosure
requirements. Keep in mind the Description of the contract,
Monthly Payments, and schedule of payments.
Utilize Reference Materials
• GASB 87 Guidance
• The GASB Implementation Guide (2019-03)
• The 2021–22 School District Accounting Manual
• Attend WASBO Classes and Presentations
• The State Auditor’s website for information on Lease
Accounting.
• The Blue Book
• The GFOA website
Leases in Summary
• Communicate with your Administrators and Purchasing Director.
• It is highly recommended that school districts PREPARE NOW
for new lease accounting.
• Identify leases and contracts which apply.
• Build your spreadsheet now.
• Document key provisions:
• Such as the lease term, extensions, termination
provisions, payment provisions, and an implied interest
rate.
Leases in Summary
• Just because the word “lease” isn’t in the agreement, doesn’t
mean it doesn’t meet the definition of a lease under GASB
87.
• And not all “leases” meet the definition of the new standard.
• It’s the substance of the agreement that you must analyze –
and document.
GASB 87 Accounting for Leases
We hope this presentation is a benefit to you.
If you have questions, let us know.
The Q&A will be provided soon.
Thank you
