GASB 87, Leases. Ali H. Hijazi, Senior Manager

Transcription

1 GASB 87, Leases Ali H. Hijazi, Senior Manager

2 Agenda Timing Defining Our Terms Accounting and Disclosure Requirements Preparation Recommendations Examples 2

3 Timing

4 Timing The requirements of this standard are effective for reporting periods beginning after December 15, 2019 (i.e. beginning with December 31, 2020 year-end entities). Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation (or, if applied to earlier periods, the beginning of the earliest period restated). 4

5 Defining Our Terms

6 Key Terms What is a lease? A lease is a contract that conveys control of the right to use another entity s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction What is the lease term? The period during which a lessee has a noncancelable right to use an underlying asset plus any periods where the lessee or the lessor have the sole option to extend or terminate the lease but it is reasonably certain that the lease will continue The lease term excludes periods for which both the lessee and the lessor have a sole option to terminate the lease 6

7 What is a Regulated Lease? A lease that meets ALL of the following conditions as a result of external laws, regulations or legal rulings is a regulated lease under GASB 87: Lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator. Lease rates should be similar for lessees that are similarly situated. The lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided the lessee s use of the facilities complies with generally applicable use restrictions The Federal Aviation Administration has mandated the three requirements above for all aeronautical uses at airports. Agreements related to non-aeronautical uses are not subject to the regulations above and therefore do not meet the definition of a regulated lease under GASB 87. 7

8 What is an Aeronautical Use? The FAA s Rates and Charges Policy sets forth the following: Individuals or businesses providing services involving operation of aircraft or flight support directly related to aircraft operation are considered to be aeronautical users. Aviation-related uses that do not need to be located on an airport, such as flight kitchens and airline reservation centers, are considered nonaeronautical uses. Nonaeronautical uses include public parking, rental cars, ground transportation, as well as terminal concessions such as food and beverage and news and gift shops. Federal law and policy on reasonableness of fees and other terms of airport access do not apply to nonaeronautical uses. 8

9 Accounting and Disclosure Requirements

10 Non-Regulated Leases Overview Under GASB 87, a lessor that enters in a non-regulated lease will account for the lease as follows: Record a lease receivable measured at the present value of lease payments expected to be received during the lease term. Record a deferred inflow of resources measured at the value of the lease receivable plus any payments received at or before commencement of the lease term that relate to future periods. Recognize interest revenue on the lease receivable and an inflow of resources (for example, revenue) in a systematic and rational manner over the term of the lease. 10

11 Non-Regulated Leases Lease Receivable More on the measurement of the lease receivable: Variable payments based on the performance of the lessee or the use of the underlying asset is not included in the measurement of the lease receivable. The portion of a variable payment stream that is fixed in substance, such as a minimum annual guarantee, is included in the measurement of the lease receivable A variable payment stream that is tied to an index or a rate (such as the consumer price index or a market interest rate) is included in the measurement of the lease receivable 11

12 Non-Regulated Leases Lease Receivable Are the following payment streams included or excluded from the measurement of the lease receivable? A concessionaire pays the greater of 7.5% of gross revenues or $50,000 per month A lessee s minimum annual guarantee is adjusted upwards annually by the consumer price index Other examples? 12

13 Non-Regulated Leases Discount Rate What discount rate should be used in the measurement of the lease receivable? The discount rate used in measuring the lease receivable should be the interest rate that the lessor charges the lessee. This may be the interest rate implicit in the lease. 13

14 Non-Regulated Leases Discount Rate How do I compute the interest rate implicit in a lease? The implicit rate is the rate at which: the sum of the present value of (i) the lease payments and (ii) the unguaranteed residual value equals the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor The two most significant estimates impacting this implicit rate calculation are: The fair value of the underlying asset The unguaranteed residual value 14

15 Non-Regulated Leases Discount Rate Determining fair value of the underlying assets Fair value is impacted by, among many other factors, the following: Age/remaining useful life of the facilities If the lessee provides a service to the public, location may be a consideration Anticipated passenger growth trends Local economy Etc. This is a significant estimate underpinning the discount rate calculation. 15

16 Non-Regulated Leases Discount Rate A key objective of a successful implementation is the development of a methodology for determining the discount rate, which can be applied as the airport enters into new leases Work with your auditors up-front to ensure that the methodology is reasonable and appropriate in the circumstances Discuss whether the discount rate would warrant an emphasis of matter paragraph in your audit opinion, or specific mention in any other end of audit communications 16

17 Non-Regulated Leases Disclosure The disclosure requirements for non-regulated leases include: Description of leasing arrangements including basis on which variable payments excluded from the lease receivable are determined Total inflows of resources recognized in the reporting period from leases and from variable payments excluded from the lease receivable Existence, terms and conditions of lessee options to terminate the lease or abate payments if the lessor issues debt secured by the lease payments 17

18 Regulated Leases Accounting and Disclosure Under GASB 87, revenue related to regulated leases may be recognized based on the payment provisions of the contract. Additional disclosure requirements apply to regulated leases, including: A description of the agreements and the extent to which capital assets are subject to exclusive or preferential use by major asset class and by major counterparty. Revenues recognized under these agreements during the reporting period, as well as expected future minimum payments from these agreements for each of the subsequent five years, and in five-year increments thereafter. To the extent the payments received in the current year were in excess of the minimum payments in the current reporting period, disclosure of that amount is required. 18

19 Preparation Recommendations

20 Data Gathering How can I possibly prepare for the implementation of such a significant standard? Start with the schedules utilized to prepare your existing operating lease footnote disclosures Extract any leases for which revenue is currently categorized as aeronautical revenue on your airport s Form

21 Data Gathering For each of the remaining (i.e. non-aeronautical) leases, start with your existing lease commitment schedules and identify whether each lease includes: Fixed payments Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate as of the commencement of the lease term Variable payments that are fixed in substance Residual value guarantee payments that are fixed in substance Any lease incentives payable to the lessee 21

22 Sampling and Materiality For each major category of lease, select a common lease agreement and determine the accounting impact for that agreement. Ensure stakeholder buy-off on the approach and results, so it can be replicated to the remaining population of like agreements. Consider materiality to identify some short-cuts, such as applying a standard discount rate to a population of smaller lease agreements 22

23 Example

24 Non-Regulated Terminal Building Rent Facts: Terminal building rent (non-regulated) Ten-year remaining term Future minimum lease payments disclosed under current GAAP = $3,355,000 Discount rate = 2.9% Present value of future lease payments under GASB 87 = $2,940,000 Year 1 Payment Amount = $363,000 24

25 Non-Regulated Terminal Building Rent Journal Entry 1 Beginning of Year (Measure the Lease Receivable): Lease Receivable $2,940,000 Deferred Inflow of Resources $2,940,000 Journal Entry 2 End of Year (Record Revenue): Cash $363,000 Deferred Inflow of Resources $281,000 Rental Revenue $281,000 Interest Income $82,000 Lease Receivable $281,000 25

26 Re-Measurement of the Lease Receivable The lease receivable may need to be remeasured at subsequent financial reporting dates if one or more of the following changes have occurred at or before that financial reporting date: There is a change in the lease term There is a change in the interest rate the lessor charges the lessee A contingency, upon which some or all of the variable payments that will be received over the remainder of the lease term are based, is resolved such that those payments now meet the criteria for measuring the lease receivable. 26

27 Questions?

28 Thank you! Ali H. Hijazi, Senior Manager