What does GASB 87 say about lease assets and liabilities?
GASB 87 paragraphs 21 - 34 guide how a lessee should measure and record lease assets and liabilities.
If in the lease, the following should be included when measuring your lease liability:
- Fixed payments
- The starting rate and change indicators for variable payments that are linked to a rate or index (e.g., the market interest rate or the Consumer Price Index)
- Variable payments that are fixed in substance
- Exercise prices of purchase options if you’re reasonably certain to exercise the options
- Amounts that you’re reasonably sure you’ll have to pay under residual value guarantees
- All lease incentives that you’ll receive from the lessor
- Any payments for lease termination penalties or any other payments that you’re reasonably certain you’ll need to make during the lease term
Your lease liability should not include any variable payments that are based on your future performance or usage of the leased asset because those payments are expensed as incurred.
Remember to discount future lease payments using the stated interest rate that you’re charged by the lessor. If the interest rate is not stated in the lease, you will need to calculate the implicit rate or incremental borrowing rate estimated by using the rate you’d expect to pay a bank or other lender to borrow the lease payments.
As a lessee, you will need to remeasure your lease liability in future financial periods if one or more of the following occur:
- The lease term changes
- There is a change in the likelihood of a residual value guarantee from “certain” to “not reasonably certain”, or vice versa
- There is a change in the likelihood of exercising a purchase option changes from “certain” to “not reasonably certain”, or vice versa
- The amounts you included when calculating your lease liability change
- There’s a change in the interest rate that you used as the initial discount rate
A lease asset should initially be measured as the sum of the following:
- The amount of the initial lease liability (as calculated above)
- Any lease payments made before or at the beginning of the lease term
- Any direct costs that are required to begin using the leased asset
Then you will amortize the leased asset over the shorter of either the lease agreement term or the useful life of the asset.
What’s important here?
Lessees must account for lease liabilities and lease assets using GASB 87. They must be prepared to remeasure lease liabilities in future financial periods if changes occur.