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.