GASBs Presented by: William Blend, CPA, CFE

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GASBs 87-89 Presented by: William Blend, CPA, CFE

Leases: Statement 87

Effective Date and General Implementation Effective for Florida fiscal year end 2021. Earlier application is encouraged. 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). Lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases become the carrying values of the underlying assets. 3

Definition of a Lease A contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset), as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples: assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded. 4

Determination of Whether a Contract Conveys Control The government should assess whether or not a contract conveys control of the right to use the underlying asset by determining if it meets both of the following criteria: A. Right to obtain the present service capacity from use of the underlying asset, as specified in the contract. B. Right to determine the nature and manner of use of the underlying asset, as specified in the contract. 5

Examples of Contracts Specifically Excluded Leases of intangible assets, licensing contracts for patents, and copyrights; and licensing contracts for computer software. Leases of biological assets, including timber, living plants, and living animals. Leases of inventory. Contracts that meet the definition of a service concession arrangement. Supply contracts, such as power purchase agreements. Contracts for services except those that contain both a lease component and a service component. 6

Lease Term - Short Term or Not? Lease term is the period during which a lessee has a non-cancelable right to use an underlying asset, plus the following periods, if applicable: Periods covered by a lessee s or lessor s option to extend or terminate the lease if reasonably certain, based on all relevant factors, that the lessee or lessor will exercise option. Fiscal funding or cancellation clauses should affect the lease term only when it is reasonably certain that the clause will be exercised. 7

Lease Term - Short Term or Not? (Cont.) Lessees and lessors should reassess the lease term only if one or more of the following occur: Lessee or lessor elects to exercise an option that was previously determined would not be exercised. Lessee or lessor elects not to exercise an option previously that determined would be exercised. An event specified in the lease contract that requires an extension or termination of the lease takes place. 8

Short-Term Lease Reporting Short-Term Lease is Defined as - A lease that, at commencement, has a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised. For a lease that is cancelable by either party, such as a rolling month-to-month lease or a year-to-year lease, the maximum possible term is the noncancelable period, including any notice periods. 9

Short-Term Lease Reporting (Cont.) Lessees reporting - recognize lease payments as outflows of resources (expense/expenditure) based on contract provisions. Recognize an asset if payments are made in advance or a liability for rent due. The lessee should not recognize outflow of resources during any rent holiday period. Lessors reporting - recognize lease payments as inflows of resources (revenue) based on contract provisions. Recognize a liability if payments are received in advance or an asset for rent due. The lessor should not recognize an inflow of resources during any rent holiday period. 10

Lessee Reporting Issues Other Than Short Term Leases

Lessee Reporting - Other than Short Term Asset Liability Deferred Inflow Initial Reporting Intangible asset (right to use underlying asset) value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in use Present value of future lease payments (incl. fixed payments, variable payments based on index or rate, reasonably certain residual guarantees, etc.) N/A Subsequent Reporting Amortize over shorter of useful life or lease term Reduce by lease payments (less amount of interest expense) N/A 12

Lessee Reporting - Other than Short Term (Cont.) Lessee Liability Measurement Lessee should measure the lease liability at the PV of payments expected to be made during the lease term. Measurement of the lease liability should include the following, if required by a lease: Fixed payments Variable payments that depend on an index or a rate Variable payments that are fixed in substance Amounts reasonably certain of being required to be paid under residual value guarantees Other payments that are reasonably certain of being required based on an assessment of all relevant factors 13

Lessee Reporting - Other than Short Term (Cont.) Lessee Asset Measurement Lessee should initially measure the lease asset as the sum of the following: Amount of the initial measurement of the lease liability Lease payments made to the lessor at or before the commencement of the lease term, less any lease incentives received from the lessor at or before the commencement of the lease term Initial direct costs that are ancillary charges necessary to place the lease asset into service 14

Lessee Reporting - Other than Short Term (Cont.) Lessee Re-Measurement Lessee should re-measure the lease liability and asset at subsequent financial reporting dates if one or more of the following changes have occurred, and the changes individually or in aggregate are significant: Change in the lease term Contract option elections previously determined are changed Any event specified in the contract that requires an extension or termination takes place Note - If the adj. (re-measure) is greater than the CV of asset difference reported in activity statement 15

Lessee Reporting - Other than Short Term (Cont.) Lessee Reporting Using Current Resources Measurement (Fund Reporting) Initial Period Reporting - Expenditure and other financing source Subsequent Period Reporting - Lease payments should be accounted for consistent with principles for debt service payments on long-term debt 16

Lessee Reporting - Other than Short Term (Cont.) GASB Presentation Example: Temporary Building Lease Lease starts 1/01/21 for 60 months; $1,000 monthly payment 1 st of each month After 60 months, month-to-month basis until building is returned During month-to-month period, rate can be adjusted upward based on CPI with 30 days notice to Lessee If building is declared a total loss, Lessee will pay $39,000 equipment value, at which time Lessee will become the owner Lessee pays Lessor $2,000 initial set-up cost and will pay $1,700 dismantle cost at end of lease Discount rate (provided by Lessor) is 3% 17

Lessee Reporting - Other than Short Term (Cont.) Present value of $1,000 monthly payments for 5 years (60 months): = PV Rate =.0025 (3% per year / 12 months to get rate per month) NPer (number of periods) = 60 Pmt (monthly payment) = $1,000 FV (future value) = 0 Type = 1 if payments are made at beginning of period; 0 if payments are made at end of period = $55,791 Total (for both the intangible asset and lease liability) $55,791 + $2,000 set-up cost = $57,791 What about $1,700 dismantle fee? 18

Lessee Reporting - Other than Short Term (Cont.) JEs January 1 Governmental funds Debit building rental expenditure $57,791 Credit other financing sources $57,791 To record capital expenditure and related financing from lease of temporary building Debit redemption of principal $2,000 Credit cash $2,000 To record payment of set-up cost for leased temporary building 19

Lessee Reporting - Other than Short Term (Cont.) JEs January 1 Government-wide and Proprietary Funds Debit leased building $57,791 Credit lease liability $57,791 To record capital asset and related liability from lease of temporary building Debit lease liability $2,000 Credit cash $2,000 To record payment of set-up cost for leased temporary building 20

Lessee Reporting - Other than Short Term (Cont.) Calculation of First 12 months: Set up an interest amortization schedule for each month Divide the $1,000 monthly payment into interest and principal (Debit redemption of principal and interest expenditure and credit cash) Total amounts for the first year: Redemption of principal $10,613 Interest 1,387 Total $12,000 (excluding $2,000 set-up cost payment) 21

Lessee Reporting - Other than Short Term (Cont.) Total First-Year Entries (12 months): Governmental Funds Debit redemption of principal $10,613 Debit interest expenditure 1,387 Credit cash $12,000 To record 12 monthly lease payments for first year Government-wide and Proprietary Funds Debit leases payable $10,613 Debit interest expense 1,387 Credit cash $12,000 To record 12 monthly lease payments for first year 22

Lessee Reporting - Other than Short Term (Cont.) Governmental Conversion Entries to Government-wide Debit other financing sources $57,791 Credit lease liability $57,791 Debit leased buildings $57,791 Credit building rental expenditure $57,791 To reclassify right to use leased building and building lease payable Debit redemption of principal $12,613 Credit lease liability $12,613 To reclassify monthly lease payments and set-up cost 23

Lessee Reporting - Other than Short Term (Cont.) JEs December 31 Government-wide and Proprietary Funds Debit amortization expense $11,558 Credit accumulated amortization $11,558 To record amortization of right to use leased building ($57,791 / 5) Debit interest expense $113 Credit interest payable $113 To accrue December interest on leased temporary building 24

Lessee Reporting - Other than Short Term (Cont.) Lessee Disclosures General description of leasing arrangements, including Basis, terms, and conditions, on which variable lease payments are determined Existence, terms, and conditions, of residual value guarantees provided by the lessee Total amount of assets recorded under leases, and the related accumulated amortization, disclosed separately from other capital assets Lease assets disaggregated by major classes of underlying assets, disclosed separately from other capital assets Variable lease payments recognized during the period but not previously included in the lease liability 25

Lessee Reporting - Other than Short Term (Cont.) Lessee Disclosures (Cont.) Other payments recognized during the period but not previously included in the lease liability (such as residual value guarantees or penalties) Principal and interest requirements to maturity, presented separately, for the lease liability for each of the five subsequent fiscal years and in fiveyear increments thereafter Commitments under leases before the commencement of the lease term Components of any loss associated with an impairment Provide relevant disclosures, if applicable, for sublease transactions saleleaseback transactions, lease-leaseback transactions Lessee is not required to disclose collateral pledged as a security for a lease if that collateral is solely the asset underlying the lease 26

Lessee Reporting - Other than Short Term (Cont.) 27

Lessee Reporting - Other than Short Term (Cont.) 28

Lessor Reporting Issues Other Than Short Term Leases

Lessor Reporting - Other than Short Term Initial Reporting Subsequent Reporting Asset Liability Deferred Inflow Lease receivable (generally including same items as lessee liability) Continue to report leased asset and continue to depreciate unless its required to be returned in its original or enhanced condition Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) Reduce receivable by lease payments (less payment needed to cover accrued interest) N/A N/A Equal to lease receivable plus any cash received up front that relates to a future Period Recognize revenue over the lease term in a systematic and rational Manner 30

Lessor Reporting - Other than Short Term (Cont.) Lessor Receivable Measurement Lessor should measure the lease receivable at the PV of payments expected to be received during the lease term, reduced by any provision for uncollectibles. Measurement should include the following, if required by a lease: Fixed payments Variable payments that depend on an index or a rate Variable payments that are fixed in substance Residual value guaranteed payments that are fixed in substance Any lease incentives payable to the Lessee 31

Lessor Reporting - Other than Short Term (Cont.) Lessor Receivable Measurement (Cont.) Initially excludes the following: Residual value guarantees that are not fixed in substance should be recognized as a receivable when payment is required, and amount can be reasonably estimated Purchase option payments or termination penalties recognized when exercised 32

Lessor Reporting - Other than Short Term (Cont.) Lessor Receivable Measurement (Cont.) Lease payments received should be discounted using the interest rate the Lessor charges the Lessee, which may be the rate implicit in the lease In subsequent periods, the Lessor should calculate the amortization of the discount on the lease receivable and report that amount as interest revenue for the period to produce a constant periodic ROR Payments received should be allocated first to the accrued interest receivable and then to the lease receivable 33

Lessor Reporting - Other than Short Term (Cont.) Lessor Receivable Measurement (Cont.) Re-measure the lease receivable and update the discount rate when one or more of the following occur and are expected to significantly affect the receivable amount: There is a change in lease term, or There is a change in the rate the Lessor charges the Lessee A contingency is resolved making variable payments fixed If re-measured, also re-measure for changes in an index/rate used to determine variable lease payments If the discount rate is updated, the receivable should be adjusted using the revised rate 34

Lessor Reporting - Other than Short Term (Cont.) Lessor Deferred Inflow Measurement Amount of the initial measurement of the lease receivable Lease payments received from the Lessee at or before the commencement of the lease term that relate to future periods (for example, the final month s rent), less any lease incentives paid to, or on behalf of, the Lessee at or before the commencement of the lease term Recognize revenue in a systematic and rational manner over the term of the lease If re-measured, generally done same way as lease receivable 35

Lessor Reporting - Other than Short Term (Cont.) Governmental Fund Reporting In governmental funds, report lease receivable and deferred inflow of resources Recognize deferred inflow of resources as revenue when available 36

Lessor Reporting - Other than Short Term (Cont.) JEs - January 1 (Using GASB Example Previously Discussed) All Funds and Government-wide Debit lease receivable $57,791 Credit deferred inflow of resources $57,791 To record receivable and related deferred inflow from leasing Debit cash $2,000 Credit lease receivable $2,000 To record receipt of set-up fees 37

Lessor Reporting - Other than Short Term (Cont.) JEs - January 1 (Using GASB Example Previously Discussed) (Cont.) All Funds and Government-wide Debit cash $12,000 Credit lease receivable $10,613 Credit interest income $1,387 To record receipt of first 12 monthly lease payments 38

Lessor Reporting - Other than Short Term (Cont.) JEs - January 1 (Using GASB Example Previously Discussed) (Cont.) All Funds and Government-wide - Year End Debit deferred inflow of resources $11,558 Credit lease income $11,558 To record lease income Debit depreciation expense $5,000 Credit accumulated depreciation $5,000 To record annual depreciation on underlying asset Debit interest receivable $113 Credit interest income $113 To accrue December interest on lease receivable 39

Lessor Reporting - Other than Short Term (Cont.) Lessor Exceptions The following transactions do not apply to general Lessor recognition and measurement guidance (but still required to provide certain disclosures) Leases of tangible assets that are investments. Investments fall under fair value reporting requirements Certain regulated leases (e.g., airport-airline agreements) Airport-airline agreements have features that don t operate like financings 40

Lessor Reporting - Other than Short Term (Cont.) Lessor Disclosures Lease activities may be grouped for disclosure purposes General description of leasing arrangements; basis, terms, and conditions on which variable lease payments not included in the lease receivable are determined Total amount of inflows recognized in the reporting period related to leases, if not displayed on face of financials The lease inflows related to variable lease payments and other payments not previously included in the lease receivable Include inflows related to residual value guarantees and termination penalties 41

Lessor Reporting - Other than Short Term (Cont.) Lessor Disclosures If lease payments secure Lessor s debt. Disclose, the existence, terms, and conditions of options by the Lessee to terminate a lease or abate lease payments If government s principal ongoing operations consist of leasing to other entities: Disclose maturity analysis of all future lease payments included in lease receivable Payments for each of the first five years Payments in five-year increments thereafter Show principal and interest separately 42

GASB 87 Other Matters

GASB 87 - Other Matters Contracts with Multiple Components Separate contracts into lease and non-lease components or multiple lease components Allocate consideration to multiple underlying assets if: Differing lease terms, or In differing major asset classes for disclosure 44

GASB 87 - Other Matters (Cont.) Contracts with Multiple Components (Cont.) Allocation Process Use any prices for individual components if price allocation not unreasonable based on contract terms and professional judgment (maximizing observable information) If no prices or if not reasonable, use best estimate based on professional judgment (maximizing observable information) If not practicable to determine best estimate, may account for components as single lease unit 45

GASB 87 - Other Matters (Cont.) Contract Combinations Contracts entered into at or near the same time with the same counterparty should be considered part of the same lease contract if either of the following criteria is met: a) The contracts are negotiated as a package with a single objective b) The amount of consideration to be paid in one contract depends on the price or performance of the other contract Combined contract then subject to multiple components guidance 46

GASB 87 - Other Matters (Cont.) Subleases Accounted for as separate transactions from the original lease Do not offset original lease liability and sublease receivable Disclosures for original Lessee (now the Lessor) Include subleases in the general description of lease arrangements Lessor transactions related to subleases should be disclosed separately from the original Lessee transactions 47

GASB 87 - Other Matters (Cont.) Intra-Entity Leases Leases with/between blended component units Eliminations for internal leasing activity take place before the financial statements are aggregated Leases with/between discretely-presented component units Treat like normal leases, but present receivables and payables separately 48

GASB 87 - Other Matters (Cont.) Related-Party Leases Recognize substance of the transaction, when substance is significantly different from legal form Example - a short-term lease is long term if parties have an understanding that lease will be extended several years Use equity method for investments in stock Disclose the nature and extent of related-party leases 49

GASB 87 - Other Matters (Cont.) Cash Flows How should lease activities be classified in the statement of cash flows? Most leases result in the Lessee recording an intangible lease asset. Capital and related financing activities category is directly affected by capitalization policies. If a lease results in a Lessee recognizing a lease asset, the cash flows (including the interest portion) should be included in the capital and related financing activities category as an outflow in the Lessee s statement of cash flows. 50

GASB 87 - Other Matters (Cont.) Cash Flows (continued) How should lease activities be classified in the statement of cash flows? A Lessor should normally classify the inflows in the Lessor s statement of cash flows consistent with how the underlying asset is classified on the statement of net position, that is, as an investing or capital and related financing activity. The lease transaction is a financing of a nonfinancial asset. The timing of the cash flows does not coincide with the date of the financing, but the cash flows are, nevertheless, payments for the right to use the nonfinancial asset. 51

GASB 87 - Other Matters (Cont.) Technology in Managing Leases Software to amortize the lease asset and schedule the principal and interest payments Document software for lease documents to identify key lease provisions Imaging software to scan and index lease documents in one central place Debt management software - automatically generate amortization schedules, use for CAFR reporting, and create journal entries 52

GASB 87 - Other Matters (Cont.) Planning Tips Analyze existing lease contracts and gather information for reporting and disclosure requirements Implement/update internal controls Update information technology systems GL system/accounts Work with grant providers to address changes in lease reporting Address potential changes in statutes and policies, debt limits, and compliance with debt covenants Potential impact to budgeting 53

Certain Debt Disclosures: Statement 88 Effective for reporting periods beginning after December 15, 2019 (FYE 6/30/21 & 9/30/21)

Effective Date, Scope and Applicability Effective for Florida fiscal year end 2019. Earlier application is encouraged. Defines debt for purposes of disclosure in notes to financial statements Establishes additional financial statement note disclosure requirements related to debt obligations of governments, including direct borrowings and direct placements 55

Definition for Disclosure Purposes Debt is defined as: A liability that arises from a contractual obligation to pay cash or other assets used in lieu of cash in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. Debt does not include leases, except for contracts reported as a financed purchase of the underlying asset, or accounts payable. 56

Disclosures In addition to other debt disclosure requirements, governments should disclose summarized information about the following items: Amount of unused lines of credit Assets pledged as collateral for debt Terms specified in debt agreements related to significant: - Events of default with finance-related consequences - Termination events with finance-related consequences - Subjective acceleration clauses Separate debt disclosures should be made regarding (a) direct borrowings and direct placements of debt from (b) other debt 57

Accounting for Interest Incurred before the End of Construction: Statement 88

Effective Date and Transition Effective for Florida fiscal year end 2021. Earlier application is encouraged. Requirements should be applied prospectively 59

Accounting Financial Statements prepared using economic resources measurement (Accrual Accounting) Interest cost incurred before the end of a construction period should be recognized as an expense in the period in which the cost is incurred. Such interest cost should not be capitalized as part of the historical cost of a capital asset. Financial statements prepared using the current financial resources measurement focus (Modified Accrual) Interest cost incurred before the end of a construction period should be recognized as an expenditure on a basis consistent with governmental fund accounting principles. 60

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