What is the Lease Receivable under GASB 87?
The lease receivable under GASB 87 is the present value of the lease payments the lessor expects to receive from the lessee over a lease term. It excludes interest and is decreased by any incentives provided to the lessee.
What is the Deferred Inflow of Resources under GASB 87?
The deferred inflow of resources is an account representing the receipt of resources that will provide future economic benefits but haven't met the criteria for revenue recognition yet.
To calculate the deferred inflow of resources, take the lease receivable, add lessee prepayments, and subtract lease incentives paid to the lessee. The lessor credits the deferred inflow of resources at lease inception to offset the lease receivable.
GASB 87 Lessee Accounting, Step-By-Step
Here is the accounting process for any lease contracts that fall within GASB 87’s lease agreement definition:
1. Calculate the Lease Receivable
First, you will calculate your lease receivable. This is equal to the present value of the payments you’ll receive over the lease to maturity.
You’ll need to know the lease’s discount rate to calculate this. If you don’t state it explicitly in the lease agreement, you may be able to derive an implicit rate based on information in the lease.
If the discount rate is not in the lease and you can’t easily derive it, you must use an incremental borrowing rate as your discount rate.
2. Calculate the Deferred Inflow of Resources
Next, you calculate the corresponding deferred inflow of resources.
Start by adding any payments you receive before or at lease inception to the lease receivable number if those payments correspond to a future lease period.
After, subtract the lease incentives you pay to the lessee to arrive at your deferred inflow of resources.
3. Record Lease Receivable and Deferred Inflow of Resources Journal Entry
Now, you recognize the lease with an initial journal entry.
Debit the lease receivable to recognize that asset and credit the deferred inflow of resources to recognize the payments you haven’t yet received.
4. Recognize Receipts & Lease Revenue Over Time
As payments are received and time goes by, you must recognize the reduction of the lease receivable and the revenue associated with the deferred inflow of resources.
When each payment is received, you will recognize the inflow of cash, a decrease in the lease receivable, as well as a portion of the payment being attributed to an interest income.
Recognizing the revenue associated with the deferred inflow of resources must happen in a “systematic and rational” manner. You can use methods like the straight-line method to recognize the revenue.
5. Create Financial Statement Disclosures
As a lessor, you must prepare the following disclosures on your financial statements:
- A general description of the lease arrangements, including the lease basis, terms, and conditions used to determine variable payments not included in the lease receivable.
- The existence, terms, and conditions of lessee options to terminate the lease or reduce/remove payments if you issued debt secured by the lease payments.
- Total resource inflows from leases recognized in the reporting period if this amount cannot be determined from financial statements. These inflows can include lease revenue, interest revenue, and any other lease-related inflows.
- Resource inflow amounts recognized in the reporting period for variable/other payments not previously included in the lease receivable measurement — including inflows related to residual value guarantees (RVGs) and termination penalties.
- Minimum lease payments you expect to receive for each of the five subsequent fiscal years and in five-year increments thereafter. Show the principal and interest portions separately.
Special Cases
Not all contracts are considered lease agreements subject to the above accounting procedures under GASB 87. These exceptions can differ in accounting procedures.
Here are these special cases and brief explanations of how to account for them:
Short-term leases
Lease terms of 12 months or less make short-term leases. This includes options to extend, regardless of either party’s intent to exercise those options.
Accounting for these is similar to FASB 13 operating lease accounting. Lessors record lease payments received as resource inflows, or revenues, based on the lease contract’s payment provisions.
The lessor records the lessee’s advance payments as liabilities and an asset for rent due for payments to be received in future reporting periods.
Contracts that transfer ownership
Lease agreements that transfer the underlying asset to the lessee at the end of the lease term are called contracts that transfer ownership.
They do not qualify as leases under GASB 87. The lessor reports one of these as a financed sale of the underlying asset.
Agreements cannot contain termination options to qualify for this treatment. They can contain fiscal funding or cancelation clauses if both parties are reasonably certain these options won’t be exercised.
Contracts with multiple components
Entities must account for lease and non-lease components as separate contracts.
For contracts with multiple underlying assets, the lessor should account for each as a separate lease contract if contract prices for each are stated.
If contract prices are not stated, parties can use professional judgment to determine these prices. Otherwise, account for any assets that cannot be reasonably determined as a single lease.
Contracts created with the same counterparty at or near the same time should be treated as one lease.
Exceptions
GASB 87 makes exceptions for the following types of leases:
- Leases of intangible assets: These leases are for assets without physical substance. For example, the rights to explore for oil and gas or software licenses.
- Leases of biological assets: These leases are for assets that are living, such as plants and animals.
- Leases of inventory
- Service concession arrangements: These are excluded because GASB 60 covers them.
- Leases in which conduit debt finances the underlying asset: These are excluded unless the lessor reports both the debt and the underlying asset.
- Supply contracts: A seller agrees to provide a buyer with a certain amount of specified goods and services. The buyer exclusively agrees to buy this amount from the seller.
- Leases of assets that are investments
- Certain leases subject to external laws, regulations, or legal rulings
The New Lessor Lease Accounting
GASB 87 is here to stay. Lessors must ensure they properly calculate the lease receivable and deferred inflow of resources, create the correct initial journal entries, then recognize lease revenue over time.
However, special cases and exceptions may have different accounting procedures and disclosures.
Lease management software like DebtBook is just what you need to keep things organized. With a robust software system at your side, you can comply effortlessly with every standard and redirect your time towards more important activities.
