GASB Lease Standard, Are You Ready?

by Brian Joseph Hemmerle, CPA, CFE

You may be thinking, “I have plenty of time to implement the new GASB Lease Standard, especially now that GASB Statement 95 postponed the effective date to periods beginning after June 15, 2021. I don’t need to worry about this until I issue my June 30, 2022 CAFR, right?” It is true the implementation has been postponed; however, the accounting for this lease standard, and all new leases you enter into as a government, will be greatly affected starting July 1, 2021. That’s only six months away!

Lucky for you, the ASCPA has an upcoming Government Accounting Virtual Conference in February 2021 with a very knowledgeable speaker, Michael Stelpstra, CPA, from the Arizona Auditor General’s Office speaking for 60 minutes on the GASB lease standard. Stelpstra works as a technical manager for the AG’s office, and he is a wealth of knowledge. If you have never heard him speak at a conference in the past, you are missing out. His knowledge of GASB, Uniform Guidance and all things governmental accounting is extensive, and he has generously agreed to speak with us regarding the all-important lease standard that is rapidly approaching.

Why is it important to hear another lease standard presentation? The implementation of this standard will most likely prove to be more involved then most GASB standards of the past. GASB has redefined what a lease is, causing the inclusion of contracts and agreements that have never been considered a lease to fall under this new definition. The accounting for this new standard is introducing concepts like “right-to-use assets” similar to that of capital assets. It will impact nearly all types of governments. If you haven’t already started inventorying your potential leases for implementation, you will be well served in attending this presentation.

Some believe they don’t have any material leases to worry about; however, GASB’s implementation guide for leases makes it clear, that copier lease you keep referring to, isn’t the only contract you should be considering. Just like a list of trivial receivables, where no one receivable is material, you still record and report the sum of all your receivables as it often amounts to a very material line item on your financial statements. This standard has provisions that will both scope out some contracts and require you to record others. The next six months is the perfect time to begin collecting all your contracts that have anything to do with a tangible asset and determine if they meet the definition of a lease by way of inventorying each agreement.

It should also be noted that many governments have contracts that will make them the lessor under this new standard. Does your government operate an airport, golf course or recreational complex? Those are just a few examples of situations where you may have contracts that will define you as a lessor. Of course, the accounting for a lessor differs from that of a lessee in ways you will want to understand before you implement. Those deferred inflows and outflows you have for pensions, other post-employment benefits and debt refundings will now have a new companion on your financial statements.

Think you may be able to successfully scope out your leases by making them all short term? Think again. GASB thought of that, and they have made it more challenging then you think to scope out a short-term lease. For instance, the implementation guide gives an example of a six-month lease with the option to extend for another 12 months, but the government is not reasonably certain they will exercise that option. Many people might argue this lease is scoped out of the lease standard, but according to question 4.18 in the lease implementation guide, you have to include leases with a maximum possible term of greater than 12 months, including options to extend regardless of the probability of the option being exercised. In that example you would record a six-month lease!

Think you can just sign a bunch of one-year leases in a row for the same asset? Think again. Question 4.17 and 4.20 of the lease implementation guide makes it clear you have to consider contract combinations that might require you to record the lease as one contract over many years.

What about leases with options to extend that aren’t negotiated until the extension occurs? I couldn’t possibly record that extension without knowing the terms, right? Wrong! Question 4.24 of the implementation guide gives an example where you would be required to estimate the terms and still record the extension period for that lease.

Maybe you have land that is rented to a farmer and you think “farming is a biological asset so that contract is scoped out of the standard.” Think again. Using question 4.11 of the implementation guide, the crop is indeed a biological asset, but the lease is for the land, not the crop, and the land is what is being rented to the farmer; therefore, you have a lessor situation.

GASB even has a question we see a lot now with COVID-19 school closures, where schools give students computers or tablets for remote learning and allow those students to purchase the computer at the end of the year. Question 4.22 of the guide dives into this scenario and discusses the implications on the school having leased or purchased the computers themselves as defined in the standards.

I’m just scratching the surface with these examples. The lease standard and the implementation guide that goes along with it, have far reaching implications for our governments, and if you think you are ready —think again. When this standard becomes effective, you will be happy you spent the time obtaining as much CPE as you can to understanding how it will impact you and your government. Register for the upcoming ASCPA Government Accounting Virtual Conference on February 4-5, 2021. l

Brian Joseph Hemmerle CPA, CFE, is a partner at Henry+Horne specializing in audit and assurance services for governmental entities. Hemmerle is a member of the ACFE, AICPA, ASCPA, AGA, GFOA, GFOAz and AASBO, where he is often asked to present on highly technical issues affecting government audit and accounting. He can be reached at BrianH@ hhcpa.com.