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.
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.
Here is the accounting process for any lease contracts that fall within GASB 87’s lease agreement definition:
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.
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.
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.
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.
As a lessor, you must prepare the following disclosures on your financial statements:
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:
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.
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.
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.
GASB 87 makes exceptions for the following types of leases:
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.