By Bonnie Schwieger, CPA, and Chad Hess, CPA

What Your Organization Should Know About GASB 87

As you may have noticed, the Government Accounting Standards Board (GASB) has been issuing new standards over the last few years in a bid to improve the financial reporting of state and local governments. The GASB’s goal is to provide better information to financial statement users. The statement is effective for reporting periods beginning after December 15, 2019 (audits for year-end December 31, 2020).

Since GASB 87 will significantly change the way your organization accounts for leases, it’s important to get ahead of it. Here’s what you should start thinking about today.

What is GASB 87?

GASB 87 will impact you if you’re leasing property as a lessee or lessor. Generally speaking, the statement narrows the existing definition of a lease and modifies how it should be recorded on your financial statement.

The most notable change introduced by GASB 87 is a new approach to lease accounting that considers leases to be “financing of the right to use an underlying asset.” Now, a lessee must recognize a lease liability and a corresponding intangible right-to-use lease asset. As time passes and payments are made, the lease liability is reduced as the intangible leased asset is amortized. What’s more, all leases except for short-term leases (12 months or less) and leases that transfer ownership of the asset must be reported as leases. (Short-term leases can still be classified as an expense in the period incurred.)

What do you need to do to implement it?

The first thing you should do is to evaluate the leases you’re making payments on. Then, apply the GASB 87 criteria to see which leases are subject to the new standard. Short-term leases, as well as cancelable and leases that transfer of ownership of the underlying asset, are not subject to GASB 87. But working through the requirements can be fairly cumbersome.

To help you through this process, we’ve created a GASB 87 Leased Asset Worksheet which can be downloaded using the button below.

You’ll also need to include additional disclosures in your financial statement and establish the value of your leases with your auditor. Because GASB 87 also applies to lessors, you’ll need to look at property you’re leasing to other parties, too.

What do you need to do right now?

As we mentioned, GASB 87 is effective for reporting periods beginning after December 15, 2019, which means it applies to your 2020 audit. If your organization has a large amount of leased assets, you’ll want to get started transitioning to the new requirements now. Summarizing your leases and preparing for GASB 87 implementation will likely require a significant effort.

AEM is here to help. Our advisors can walk you through the process of applying the new criteria, identifying impacted leases, and assigning a value to each. If you have questions about GASB 87 or how to implement it, contact us today.

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