In June 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, which applies to entities following government accounting rules, including AAFCPAs’ clients in the Charter School industry, as well as other quasi-governmental organizations. This guidance applies to most leases with a term of over 12 months. These leases will now be recognized on the statement of net position of both the lessee and the lessor at the present value of payments expected to be made during the lease term. For leases with a term of 12 months or less, lease payments will continue to be recorded as expenses.
AAFCPAs has summarized some of the most significant changes resulting from the new statement for your convenience:
- In accordance with this statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset. The lease liability decreases as lease payments are made, and the lessee also recognizes interest expense. The right-to-use lease asset is amortized over the lease term.
- A lessor is required to recognize a lease receivable and a deferred inflow of resources. The lease receivable decreases as lease payments are made, and the lessor also recognizes interest revenue. The deferred inflow of resources is recognized as rental revenue, usually over the lease term. In addition, the lessor keeps the capital asset on their books and continues to depreciate it and evaluate it for impairment.
- For leases with related parties, the accounting under this standard is the same as third-party leases except in cases in which it is clear that the terms of the transaction have been significantly affected by the fact that the lessee and lessor are related.
This change takes effect for fiscal years beginning after December 15, 2019. Early application is encouraged.
What does AAFCPAs advise?
In order to estimate how this change will affect your Organization, AAFCPAs advises clients to summarize all of your leases and consider the impact that the new standard will have on your financial statements. If the impact on your statement of net position is potentially significant, you may want to:
- Calculate your loan covenant ratios using your statement of net position as adjusted for these accounting changes to make sure you are still in compliance
- Amend existing loan agreements so the loan covenants exclude any impact from lease accounting rule changes
- Modify or change existing loan covenant definitions and calculations to specifically exclude these leases
- Look at the impact of these changes to your revenues and expenses and the subsequent impact on any contracts, compensation agreements, etc.
- Consider if it still makes sense to lease instead of buying the asset
- Estimate the effect of this change on the timing of your revenues and expenses and re-forecast your financial results to see the full impact of the change
If you have any additional questions about how the new Lease Accountant Standard will impact you, please contact your AAFCPAs partner, or John Buckley, CPA, CGMA, at email@example.com, 774.512.4039.