What is a Non-GASB 87 Lease?

Municipalities have non-GASB 87 leases

GASB 87 is a Governmental Accounting Standards Board accounting standard that changed how municipalities must report leases in their financial statements. The standard is meant to make the financials of these entities more useful and accurate. However, not all leases fall under the purview of GASB 87.

To understand which leases do not qualify, we need to understand the determination questions introduced in the standard.

1. Does the contract convey control of the right to use another entity’s underlying asset?
2. Is the underlying asset controlled for a period of time in an exchange or exchange-like transaction?
3. Does the contract transfer ownership of the underlying asset to the lessee by the end of the contract? If yes, does it include termination options or a fiscal funding or cancellation clause that is reasonably certain of being exercised?

If the answer to either number one or two above is no, the lease will not qualify under the GASB 87 standard. If the answer to number three is yes then no, the agreement will not qualify under the GASB 87 standard.

In addition to the determinations made above, there is additional guidance on types of agreements that will not qualify. Here's a list of non-GASB 87 leases (leases that don’t have to follow GASB 87 lease accounting guidelines): 

• Inventory, biological, or intangible asset leases 
• Supply contracts
• Leases of assets that are investments
• Service concession arrangements (as per GASB 60)
• Leases of assets financed with outstanding conduit debt (unless the lessor reports both the asset and the debt)
• Certain regulated leases subject to external laws, regulations, or legal rulings
• Short-term agreements (less than 12 months including extension options, regardless of reasonable certainty to exercise)
• Cancellable agreements (mutual termination clause present)

Beyond these explicit exclusions, GASB 87 excludes certain contracts — notably service contracts that do not have an underlying asset included in the agreement. 

Example:

A local municipality has entered into an agreement for janitorial services. The agreement, which is for five years and costs $1,000 per month, includes the service provided but not the use of any underlying physical assets. Thus, the municipality’s contract is a non-GASB 87 service agreement, and would not meet the criteria based on the determination questions mentioned above.

What’s important here?

In summary, a non-GASB 87 lease is one that doesn't meet the criteria set forth in GASB 87, and therefore, it doesn't require the same level of accounting and financial reporting as mandated by the standard. However, it's crucial for government entities to carefully assess their lease agreements to determine whether they fall under GASB 87 or qualify as non-GASB 87 leases, as appropriate accounting treatment may vary based on the specific circumstances and applicable accounting standards.