Municipalities must identify non-lease components
Understanding non-lease components is vital because GASB 87 requires government entities to separate lease components from non-lease components when accounting for leases. This separation is necessary to accurately measure and recognize lease liabilities and assets on financial statements.
Non-lease components are services or rights provided alongside leased assets that are not considered part of the lease itself. They are distinct elements that may include maintenance services, property taxes, insurance, or any other services that are ancillary to the primary use of the leased asset.
Organizations must identify and allocate the total lease dollar amount separately to lease and non-lease components to perform their lease accounting correctly. They must either:
- Use price-related information outlined within the contract, or
- Use the best available information and professional judgment to determine the best estimate
Example:
Consider a government entity leasing office space that includes not only the right to use the premises (lease component) but also property taxes, common area maintenance, and utilities (non-lease components). In this scenario, the lease component involves the rental of the office space itself, while the non-lease components encompass property taxes, maintenance, and utilities. The lease payments would be allocated between the lease component (for the right to use the office space) and the non-lease components (for property taxes, maintenance, and utilities).
What’s important here?
Non-lease components play a crucial role in GASB 87 and governmental lease accounting by ensuring that lease transactions are accounted for accurately. Lease payments attributed to the lease component are used to calculate the lease liability and the corresponding right-of-use asset. Non-lease components, on the other hand, are generally expensed as incurred. It's essential for government entities to carefully identify and account for non-lease components to comply with GASB 87 effectively.
