GASB 87 10/29/2017 OBJECTIVE OF GASB 87

Transcription

1 GASB 87 LEASES OBJECTIVE OF GASB 87 Establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. REQUIRMENTS Lessee is required to recognize a lease liability and an intangible right-to-use the lease asset. Lessor is required to recognize a lease receivable and a deferred inflow of resources. 1

2 BACKGROUND 2006 FASB and ISBA started a joint project to reexamine leases 2011 GASB initiated pre-agenda research followed the developments of FASB and ISBA 2016 GASB issues exposure draft 2017 (June) GASB issued statement 87 - Leases EFFECTIVE DATE Periods beginning after December 15, 2019 Schools fiscal year beginning July 1, 2020 FY 2021 Earlier application is encouraged Applied retroactively be restating financial statements for all periods presented. If not showing comparative years, the effect of standard should be reported as a restatement of beginning net position or fund balance. GASB DEFINITIONS LEASE a contract that conveys control of the right to use another entity s nonfinancial asset (underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. 2

3 GASB DEFINITIONS - continued LEASE TERM period during which a lessee has a noncancelable right to use an underlying asset Plus the following periods if applicable Lessee s option to extend if it is reasonably certain Lessee s option to terminate the lease if it is reasonably certain Lessor s option to extend the lease if it is reasonably certain Lessor s option to terminate the lease if it is reasonably certain Reassess term only if The reasonably certain conclusion on options were wrong An event that requires an extension or termination takes place GASB DEFINITIONS - continued SHORT-TERM LEASE (excluded from standard) Defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months or less, including any options to extend regardless of their probability of being exercised GASB DEFINITIONS - continued TRANSFER OF OWNERSHIP Contracts that transfer ownership or have a $1 purchase option at the end, previously were classified as capital lease These will continue and should be reported as a financed purchase of the underlying asset by the lessee and a sale of the asset by the lessor 3

4 ACCOUNTING FOR LEASE Lessee Recognize lease liability and lease asset at the commencement of the lease Lease Liability measured at the PV of payments expected to be made during the lease term, less any lease incentives. Lease Asset measured at the amount of the lease liability, plus any payments made to the lessor at or before commencement of the lease term and certain direct costs. Lessor Recognize lease receivable and deferred inflow of resources at the commencement of the lease Lease Receivable measured at the PV of payments expected to be received during the lease term. Deferred inflow of resources measured at the amount of the lease receivable, less any lease incentives. Do not derecognize the asset underlying the lease REMEASURE LEASE LIABILITY If one or more of the following changes have occurred: Change in lease term Residual value guarantee being paid has changed in certainty Assessment of likelihood of exercising option has changed a change in estimated amounts of payments Change in the interest rate the lessor charges the lessee A change in the variable payments such that they now meet the criteria for measuring the lease liability. 4

5 ACCOUNTING FOR LEASE Lease liability example office space Commencement 5/1/2018 Term of lease five years Option additional five years (not certain) Base rent $24,000 annually - $2,000 per month Interest rate 3% (if not stated, use the lessee s estimated borrowing rate) Interest 3% Number of Payments 60 Payment Amt $2, Calculated Present Value $111, =PV((.03/12),60,2000) Lease recording Fund Financial Statements Lessee: Dr. Capital outlay $111, Cr. Other financing source $111, Lessor: Dr. Lease Receivable $111, Cr. Deferred Inflow of resources $111, Lease recording Government-Wide Financial Statements Lessee: Dr. Leased Asset $111, Cr. Lease Liability $111, Lessor: Dr. Lease Receivable $111, Cr. Deferred Inflow of Resources $111,

6 Lease liability interest expense and liability should be amortized each year LESSEE Fund Statements (lease payment split between principal and interest) Dr. Lease Principal $20, Dr. Lease Interest $3, Gov t-wide Dr. Lease Liability $20, Lease Asset amortized over the shorter of lease term or useful life of underlying asset Dr. Amortization of Lease Asset $22, Cr. Leased Asset $22, Lease Receivable amortized and interest expense should be recorded each year LESSOR Fund/Gov t-wide Statements Cr. Cash $24, Cr. Lease Revenue $20, Cr. Interest Revenue $3, Dr. Deferred inflow of Resources $20, Cr. Lease Receivable $20, OTHER POTENTIAL ISSUES Multiple components to leases 5 buses under one lease contract Contract combinations Lease payment includes maintenance contract Modifications and terminations Lease terminates before lease term is over 6

7 REQUIRED NOTE DISCLOSURES Lessees General Description of leasing arrangements Total amount of leased assets and related accumulated amortization (disclosed separately from capital assets) Total amount of leased assets by major class of underlying assets Amount of outflow of resources recognized in the reporting period Principal and interest requirements to maturity similar to long-term debt requirements Any loss associated with impairments REQUIRED NOTE DISCLOSURES - continued Lessors General Description of leasing arrangements Total amount of inflows of resources (lease revenue, interest revenue, any other lease related inflow) The existence, terms, and conditions of options by the lessee to terminate the lease or abate payments if the lessor government has the lease payment securing a debt in which the principal and interest payments are secured by the lease payments. PREPARING FOR IMPLEMENTATION Identify population of leases Typically leases currently identified as operating leases (excluding those meeting the definition of short-term leases). 7

8 PREPARING FOR IMPLEMENTATION - continued Summarize leases noting: General description of lease Commencement date Initial term Options (Lessee and Lessor) and determine whether reasonable certain to exercise Payment schedule Determine interest rate Does the lease payment include maintenance (if so need to calculate value of that) Determine PV of lease REASONABLY CERTAIN Factors to consider A significant economic incentive A significant economic disincentive A history of exercising options to extend or terminate The extent to which the underlying asset is essential to the government services Summary Recommendations Start looking at leases now and determine areas that may need clarifications: Lease terms Extension options Multi-asset contracts Others Summarize leases and determine values. Consider reading the standard. (94 paragraphs) 8

9 Questions? 9