GASB 87 Definitions, Guidelines, and Best Practices

A lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period), plus periods covered by an option to extend (if it is reasonably certain the option will be exercised) or terminate (if it is reasonably certain the option will not be exercised).

To determine whether a contract conveys control of the right to use the underlying asset, a government should assess whether it has both of the following:

• The right to determine the nature and manner of use of the underlying asset as specified in the contract

• The right to obtain the present service capacity from the use of the underlying asset as specified in the contract

What does a lessor do?

A lessor owns the asset(s) in question (such as a vehicle or building) and leases it to the lessee. They must recognize a lease receivable and a deferred inflow of resources. Because the lessor retains ownership of the asset, custody generally reverts to them at the conclusion of the lease term.

What does a lessee do?

A lessee has the right to use the asset, provided they meet the terms spelled out in the lease contract. They must recognize a lease liability and an intangible right-to-use lease asset.

Learn more about some of the implications of GASB 87 and new instructions for both lessors and lessees in “GASB 87 Changes for Lessees vs. Lessors.”

What is a short-term lease?

A short-term lease has a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract.

GASB 87 covers a wide range of leased assets, specifically targeting tangible, non-financial assets. This includes, but is not limited to, real estate properties such as land and buildings and personal properties such as vehicles and various types of equipment. However, certain leases and agreements fall outside of GASB 87, including:

• Leases pertaining to non-financial assets that might involve inventory, biological assets, and intangible assets such as patents or copyrights.

• Arrangements known as service concession agreements, typically involving a government entity providing a private sector entity the right to operate a service.

• Contracts primarily for the supply of goods and services rather than the lease of an asset.

• Leases for assets being financed through conduit debt that is yet to be settled.

• Leases with a term of 12 months or less (i.e., short-term leases), which are exempt from the requirements of GASB 87.

How can you determine if your lease type falls under GASB 87?

GASB 87 groups contracts into three buckets: 1) short-term leases, 2) contracts that transfer ownership, and 3) leases (all remaining leases of nonfinancial assets).

Once you understand the different lease classifications under GASB 87, you need to evaluate your organization’s contracts to determine if and how they may fall into the categories defined above. 

Read "Implementing GASB 87: Types of Leases" to learn more.

GASB 87 impacts both lessees and lessors from:

• Local governments (counties, municipalities, school districts)
• Higher education (public colleges and universities)
• Public hospitals and healthcare providers

Nearly every government, higher education, and healthcare organization has at least one lease, whether for buildings, land, vehicles, or equipment. That means GASB 87 will affect most organizations.

GASB 87 went into effect for fiscal years after June 15, 2021.

GASB 87 had been in discussion since 2017, with an original implementation deadline of December 2019. Due to COVID-19, it was postponed for roughly 18 months, giving local governments, higher education, and public healthcare providers additional time to prepare and comply.

Under the provisions of GASB 87, lessees are tasked with recognizing both a lease liability and an intangible asset reflecting the right to use the leased asset upon the conclusion of the lease term. The lease liability represents the present value of anticipated lease payments throughout the lease agreement. 

At the same time, the right-of-use asset is calculated based on the initial value of the lease liability, adjusted for any upfront payments made to the lessor at or before the lease start date and reduced by any incentives provided by the lessor. 

Lessors are obligated to recognize a lease receivable and a deferred inflow of resources under GASB 87. The measurement of a lessor's lease receivable mirrors the methodology used for a lessee's lease liabilities, focusing on the present value of expected lease payments. 

Similarly, the deferred inflow of resources for a lessor is assessed in the same manner as a lessee's right-of-use assets, ensuring symmetry in the financial reporting process for both parties involved in the lease transaction.

GASB 87 aims to refine the accounting and financial reporting of leases in governmental entities, improving the clarity and usefulness of information provided to users of financial statements.

Before, leases could be categorized as either a current operating lease or a capital lease. Under the new model, leases are recognized as a means to finance the right to use an asset. Essentially, GASB 87 narrows the existing definition of a lease and adjusts how leases are recorded in financial statements.

In doing so, GASB 87 establishes a single model for lease accounting based on the concept that leases are financings of the right to use an underlying asset.

GASB 87 was designed with specific objectives to enhance the overall quality and reliability of financial reporting within governmental entities. According to the Governmental Accounting Standards Board, the standard seeks to improve the informational value of governmental financial statements. GASB 87 mandates the inclusion of certain lease obligations that were previously not required to be reported, thereby offering a more comprehensive view of a government's financial commitments.

Under the standard, leases are predominantly classified as financing leases, akin to capital leases under previous guidelines, with the exception of short-term leases lasting 12 months or less. This classification supports a uniform approach to lease accounting, facilitating greater transparency. Additionally, GASB 87 also: 

Promotes uniformity across the financial statements of different governmental entities. 

By adopting a single lease accounting model, GASB 87 standardizes how both lessees and lessors recognize and report lease transactions. This includes the recognition of lease liabilities and right-to-use assets by lessees and lease receivables and deferred inflows of resources by lessors, enhancing comparability and consistency.

Increases the utility of financial statement information for users. 

GASB 87 requires detailed note disclosures concerning the timing, magnitude, and purpose of leasing arrangements, significantly aiding stakeholders in making informed decisions.

Simplifies lease accounting and enhances transparency. 

The standard simplifies the lease accounting landscape by categorizing leases into three distinct treatments: short-term leases, contracts that lead to the transfer of ownership, and those that do not. This simplification—along with the requirement for comprehensive disclosures—greatly improves the relevance and decision-usefulness of financial reports for users, aligning with GASB's objective of enhancing government financial transparency and accountability.

GASB 87 is set to update and supersede existing guidance under GASB 62 (adopted in 2010, closely aligned with Accounting Standards Codification 840) and GASB 13 (introduced in 1990), marking a significant shift in lease accounting practices. The key change revolves around lease classifications, altering the requirements for what needs to be reported and recognized on financial statements.

Under the new framework introduced by GASB 87, leases traditionally classified as operating leases may now need to be reported as capital leases within a unified lease accounting model. This approach resembles the International Financial Reporting Standards (IFRS) 16 standards, diverging from Accounting Standards Codification (ASC) 842 which maintains the distinction between operating leases and finance leases. Lease agreements will now need to be reflected on the balance sheet, necessitating the recognition of both a lease liability and a right-of-use asset for these contracts.

This transformation in lease accounting means that auditors will shift their focus from distinguishing between operating and capital leases to determining whether a lease qualifies as a contract lease under GASB 87's criteria.

What are the Differences Between GASB 87 and GASB 96?

GASB 87 applies broadly to all lease contracts for nonfinancial assets, whereas GASB 96 specifically targets subscription-based IT arrangements.

GASB 87 focuses on the rights and obligations arising from lease contracts, whereas GASB 96 deals with the unique aspects of accessing and using cloud-based and other subscription IT services.

The standards differ in their application due to the nature of the underlying agreements—GASB 87 applies to physical assets, and GASB 96 applies to IT services accessed on a subscription basis.

Both standards aim to enhance the clarity and consistency of financial reporting for governmental entities but do so in different areas of accounting.

What are the Differences Between GASB and FASB?

GASB and the Financial Accounting Standards Board (FASB) cater to distinct sectors and stakeholders within the accounting landscape. FASB is dedicated to crafting accounting standards for the private sector, whereas GASB is tailored toward public sector entities. Among the notable distinctions in their accounting frameworks are:

• Fund Accounting Utilization: GASB integrates fund accounting to meticulously track and manage resources with specific restrictions—a practice not mandated by FASB for private entities.

• Measurement Focus and Accounting Basis: The GASB framework emphasizes the monitoring of financial transactions and adopts accrual accounting to accurately reflect the financial activities of public entities. Meanwhile, FASB's approach centers on the broader spectrum of economic resource measurements, employing an accrual basis to capture the financial operations of private sector entities. 

• Financial Statement Presentation: GASB mandates that governmental entities prepare and present comprehensive, government-wide financial statements alongside traditional fund financial statements, offering a holistic view of a government's fiscal health. This expansive presentation requirement is not mirrored by FASB for private companies, highlighting a fundamental difference in financial reporting between the public and private sectors.

What are the Differences Between ASC 842 and GASB 87?

ASC 842 applies to private and nonprofit entities, whereas GASB 87 applies to state and local governments.

ASC 842 distinguishes between finance leases and operating leases based on several criteria. GASB 87 adopts a single-model approach, treating virtually all leases as finance leases. Although both standards aim to bring leases onto the balance sheet, they reflect the different priorities and reporting needs of the private sector versus government entities.

ASC 842 and GASB 87 share the goal of improving lease accounting transparency but are tailored to meet the specific needs of the sectors they serve, with distinct rules and implementation guidelines.

Lease management software, such as DebtBook, has been developed with governments and other public entities (and their unique challenges) in mind. These solutions can help organizations operate more efficiently and significantly reduce the burden placed on local teams to comply with new financial reporting standards. Most importantly, they can address all three phases of challenges faced by organizations looking to implement GASB 87:

• Upfront lease organization and data extraction

• Schedule creation

• Ongoing compliance

If this process sounds overwhelming, you may want to consider a lease management solution. These software programs help organizations implement and maintain compliance with GASB 87 by automating time-consuming processes and eliminating manual data entry.

DebtBook delivers a complete, powerful, easy-to-use, cloud-based debt and lease management software for government, higher education, and healthcare finance teams. We make GASB 87 implementation and ongoing compliance easy and produce results you will be confident in.

• Upfront Lease Organization and Data Extraction: You drag and drop your leases. Then, our team helps organize and extract data from all of your leases (or suspected leases) while documenting our work and collecting additional client information to promote accuracy. Next, we load the data into the application for you to verify.

• Schedule Creation: DebtBook generates all schedules and journal entries necessary to comply with GASB 87. Share with internal and external team members for use and verification.

• Ongoing Compliance: Our lease aggregation tool helps you painlessly collect leases from other professionals in your organization. Guest access further facilitates communication and coordination with financial advisors, auditors, and other external partners.

Schedule a demo today to see how DebtBook enables easy and confident compliance with GASB 87.