I want to follow up on some recent articles and information RBT CPAs has shared about the new lease accounting standards (called GASB 87) you need to be prepared for by year-end. Put simply, most leases will be recorded in your Long-Term Debt Account Group and Statement of Net Position at year-end; however, compliance is anything but simple and will require a significant amount of time and effort to accumulate and analyze the contracts, perform the calculations, and compile the required disclosures.

Recognizing this, we have strongly encouraged our clients to explore software solutions to help streamline the process. Then, we went one step further. We reviewed a number of lease maintenance software options and decided to partner with Trullion – a leader in the lease software industry. Clients who choose to independently engage with Trullion to automate their lease management process and who use RBT CPAs for year-end reporting will actually save on accounting fees because the automated process is less time and labor intensive than calculating everything manually.

You said the new reporting requirement applies to “most leases.” Are there any that I don’t have to worry about?

Yes, there are a couple of carve-outs. Leases that have a maximum life (including all options) of 12 months or less will be expensed as incurred. Leases that transfer ownership of the asset will be accounted for as debt. All other leases must be accounted for under GASB 87.

If my government only has a handful of leases, is it really worth the time and effort to automate?

In my opinion, yes. It is certainly possible to perform the calculations, generate journal entries, and compile the disclosure information manually, but it will be a significant time investment.

Can’t we just collect the required information in an Excel spreadsheet?

You can use Excel; however, if a lease has variable elements or is modified at any point, the formulas become more complex and cumbersome.

Can I just authorize my RBT team member to do it for me?

The simple answer is no. If RBT CPAs is auditing the government’s financial statements, then we are required to maintain our independence. Implementing the new standard “for you” would violate our independence rules and make RBT CPAs ineligible to perform the government’s audit. We will review the information generated from the software and can provide guidance and answer questions along the way, but we can’t just do the whole thing.

Can I choose to use a software other than Trullion and still engage with RBT CPAs to handle the year-end reporting?

Of course! We believe Trullion is the most cost-effective option for our clients, but there are other programs available. RBT CPAs would just need access to whatever program you choose to use.

What happens if I miss a lease that’s embedded in a larger contract?

It’s important for you to review all contracts to determine whether the arrangement contains a lease. The agreement could contain multiple elements, one or more of which may meet the lease criteria, even if the word “lease” isn’t included in the contract name.

It’s not the end of the world if you miss a lease this year and identify it later. Errors can be corrected. The method of correction will depend on the dollar value of the lease and can range from just expensing the lease in the current year to restating the financial statements for the year the lease was missed.

Why does my government have to start gathering the required information now, if we don’t need it until year-end reporting?

Remember that the new standard applies to both lessee and lessor arrangements. It will take time to review your contracts to determine if they meet the lease criteria. Then, either manually or utilizing software, you’ll need to perform the calculations, generate journal entries, and record the transactions. You’ll also need to reverse any entries you recorded during the year under pre-GASB 87 rules.

If my company uses lease management software this year, will I have to re-enter it every subsequent year? How will this impact RBT CPAs’ fees in subsequent years?

If you use the software, you do not have to re-enter the same information every year. The software will generate entries for each subsequent year. One caveat: you will have to add any new leases or modifications to existing leases that are already in the system. RBT CPAs’ fees will be for answering questions, reviewing any new information added to the system, and proposing any necessary adjustments.

If you have any additional questions or need clarification, please don’t hesitate to reach out to your RBT CPAs contact.

Did you know that, in a matter of months, your leases will be accounted for differently due to the new lease accounting standard?

While previously only capital leases were capitalized, effective for fiscal years beginning after June 15, 2021, all leases will be capitalized. That translates to January 1, 2022 for calendar year entities, and June 1, 2022/July 1, 2022 for May 31 and June 30 year end entities.  What does this mean moving forward? It means entities need to make sure they have a thorough handle on all of their leases. Now is the time to review and evaluate contracts.

The new definition of a lease under GASB 87:

“a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.” This definition change means that all contracts should be evaluated to determine if they fall within the scope of this new criteria. Contracts that were previously considered leases may no longer meet the lease criteria and vice versa.

Although “all” leases that meet the definition will be capitalized, there are a couple of important exceptions.  First, a lease that, at inception, has a maximum possible term of twelve months (including options), is classified as a short-term lease and will not be capitalized.  Second, a contract that transfers ownership of the underlying asset and does not contain termination options is recorded as a financed purchase, not as a lease, regardless of what the arrangement is called in the contract.

If your lease contract includes a non-lease element, that non-lease component must be accounted for as a separate contract distinct from the lease itself. For example, the cost of an equipment lease that includes a maintenance contract must be allocated between the two elements and accounted for separately.

Unlike the new FASB lease standard that retains the concept of an operating lease, all leases that meet the above criteria will be accounted for as finance leases under the GASB standard.  Lessors will record a lease receivable and a deferred inflow of resources. Lessees will record a lease liability and a right-to-use lease asset. These right-to-use assets are classified as intangibles.

The goal of the standard is to increase the usefulness of government financial statements by reporting lessee lease liabilities that are not currently reported.  Financial statements should also be more comparable because lessees and lessors will follow a single model, meaning that, if a lease is reported as a lease receivable by the lessor, there will also be a lease liability reported by the lessee.

Ultimately, it’s important that governments evaluate all contracts to determine whether they contain a leasing element, either from the lessee or the lessor side.  If you’d like to get a head start so you aren’t scrambling to figure out the logistics once 2022 arrives, the time to act is now. Don’t hesitate to contact our team of trusted RBT professionals to schedule a phone call or in-person visit at one of our four convenient locations.