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Governmental Accounting Standards Board (GASB) Statement 87 was set to transform lease accounting standards for government entities when it was initially scheduled to go into effect. But since the pandemic put significant strain on government operations at all levels, the board postponed the effective date by 18 months, until fiscal years beginning after June 15, 2021, and later. That means it's crunch time again.
As finance executives and advisors who survived the IFRS-16 and ASC 842 lease accounting change on the business side know, compliance entails significant changes to lease accounting and financial reporting as well as massive compliance prep work. Getting ready for GASB-87 compliance will have a similar impact on government accounting operations. The process won’t be any easier for governments, so the time to get ready is now.
What's Changing and Why Compliance Is Critical
The intent behind GASB-87 is to ensure transparent reporting of lease agreements in the entity’s financial statements. GASB-87 changes impact lessee accounting practices, including recognition of lease liabilities and right-of-use assets, except in the case of short-term leases or if ownership of the asset is transferred. In short, U.S. local government entities will no longer be able to treat operating leases as a period rent expense.
For lessees, the new standard means that lease liabilities are now recognized and measured at the present value of payments expected during the lease term. With that, right-of-use asset values should match the amount of the initial measurement of the lease liability, adjusted for any initial direct costs or prepayments made out to the lessor as well as incentives paid out by the lessor to the lessee. Under GASB-87, lessees must reduce their lease liability as they make scheduled payments, while recognizing interest expense on a periodic basis. GASB-87 also requires lessees to amortize the right-of-use assets over the shorter lease term or the assets' useful life.
For lessors, the new standard means recognizing and measuring lease receivables equal to the present value of the lease payments expected to be received over the lease term, and a deferred inflow of resources equal to the lease receivable and any additional payments on the commencement date or before the lease. The deferred inflow will need to be recognized as revenue over the lease term. As the lessor receives payments from the lessee, the lease receivable is reduced periodically as interest income is recognized.
One way or another, government entities will have to comply. Suppose entities wait until the last minute to get ready and don't start the process now. In that case, they may have to hire consultants to compile and report all of the necessary information. This would be a costly investment for government entities that cannot afford to go over their yearly allotted budget.
How Governments Can Stay Compliant
GASB-87 compliance may be especially challenging for government entities. Due to budgetary constraints and government operations' slow pace. Government offices are often managing leases and accounting processes on spreadsheets or even paper instead of using software.
Here are three pieces of advice to ensure government entities are compliant when GASB-87 goes into effect.
- Automate the Lease Accounting Processes
Tracking countless different leases using spreadsheets requires a lot of human resources and time — both of which can be better used to handle other tasks. While auditing lease accounting processes and reporting on GASB 87, now is an ideal time to identify areas for process improvement and automation in order to simplify future accounting operations. Automating as many manual operations as possible can save time, reduce errors and lead to cost savings.
- Use Reporting and Analytics to Measure Progress
By measuring progress toward meeting budgetary requirements and cost reduction goals, organizations can measure the effects of the new accounting standards, access and monitor the status of all leases across an entire organization and make accurate projections. Developing disclosure reports, management reports and reconciliation reports allows an entity to both meets its goals and identify where it may be falling short. Consistent, strategic reporting ensures entities have visibility into their lease portfolio.
- Implement Lease Accounting Software
To further automate processes and reduce manual entry, government finance teams should look to leverage a lease accounting solution that provides flexible integration capabilities to ERP systems. This will reduce future processing time and the need to input data into multiple systems. It also allows teams to have "single source of truth" to consolidate lease contracts and record assets and liabilities. Additionally, an up-to-date lease accounting solution will offer expertise on reporting requirements and changes in compliance. This ensures government teams will not be scrambling to implement future changes and has the expertise needed to ensure compliance.
Meet Your Transparency and Compliance Objectives
Governments are typically the lessor and may have lease or sublease arrangements across multiple operating entities. Like businesses with lease arrangements to manage, governments may find that the pandemic has complicated the picture, with implications such as higher vacancies and a greater urgency to understand the cash position fully.
As everyone who works in government finance knows, compliance and transparency are critical. Governments are constantly under scrutiny, so it's essential to manage all aspects of the operation — including lease accounting — effectively.
Many publicly traded companies that implemented changes to achieve IFRS-16 and ASC 842 lease accounting compliance ran into unexpected challenges along the way. So, there's no time to lose. The reprieve granted because of the pandemic is ending, so now it's time to make getting ready for GASB-87 compliance a top priority.
Jonathan D’Amico is a Solutions Engineer, Finance at Nakisa.