The Governmental Accounting Standards Board (GASB) is responsible for setting accounting standards for governmental entities in the United States. GASB Statement No. 87, Leases is their latest statement on accounting requirements for recognizing and reporting on leases by government entities.
GASB 87 is designed to make information about governments’ leasing activities more useful, relevant, and consistent by providing a single model for lease accounting, replacing operating and capital lease categories from previous statements.
In this guide, we’ll walk you through everything you need to know about GASB 87, whether you’re a lessee or a lessor, including:
- When GASB 87 went into effect
- Who is subject to GASB 87
- Which leases are subject to GASB 87 (and which are exempt)
- How to do lessee accounting under GASB 87
- How to do lessor accounting under GASB 87
- How to account for lease contracts with multiple components
- How to account for lease terminations and modifications
- How to account for subleases and leaseback transactions
- How GASB 87 differs from ASC 842 and IFRS 16
Along the way, we’ll explain how Tango Lease streamlines your accounting processes and helps keep you compliant with lease accounting standards like GASB 87.
GASB 87 effective date
GASB 87 was first proposed in 2017, and the effective date was set for December 15, 2019. However, following an 18-month postponement due to COVID-19, GASB 87 actually went into effect on June 15, 2021.
All organizations subject to GASB 87 must now comply with its requirements, and they are encouraged (where practicable) to restate financial statements for periods prior to when it went into effect.
Who is subject to GASB 87?
All lessees and lessors involved in leases to or from US governmental entities are subject to the standards of GASB 87. In other words, GASB 87 applies to you if you are either:
- A governmental entity with any applicable lease contract
- A landlord (or other lessor) that leases to a governmental entity
- A lessee who leases from a government entity
Examples of US governmental entities subject to GASB 87 include:
- State governments
- Local governments
- Municipal governments
- Public colleges and universities
- Public utilities
- Public airports
- Public hospitals and health providers
- Public benefit corporations and authorities
- Public employee retirement systems
Whether you’re a governmental entity, a landlord leasing to one, or a company leasing from one, Tango has you covered. Our lease software helps both lessees and lessors confidently manage their lease activities.
Which leases are subject to GASB 87 (and which are exempt)?
GASB 87 defines a lease as, “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 of leases subject to GASB 87 include:
- Land
- Buildings
- Vehicles
- Equipment
As with ASC 842 and IFRS 16, one of the major changes GASB 87 introduces is accounting for embedded leases, where a contract contains both lease and non-lease components—such as the right to use a piece of equipment and a service related to that equipment. In these contracts, GASB 87 requires lessees to account for the lease component separately.
Certain kinds of leases are exempt from GASB 87. These include:
- Some intangible assets, such as licenses, patents, and exploration rights for nonrenewable resources
- Supply contracts
- Service concession agreements
- Inventory
- Biological assets
For the most part under GASB 87, lessees must recognize lease liability and an intangible right-to-use lease asset, and lessors must recognize a lease receivable and a deferred inflow of resources. However, in the case of a few exceptions, certain leases have separate guidance to follow.
Lessees don’t need to recognize a lease liability and a lease asset in the case of:
- Short-term leases
- Leases that transfer ownership of the underlying asset
Additionally, lessors don’t need to recognize a lease receivable and a deferred inflow of resources in the case of:
- Short-term leases
- Leases that transfer ownership of the underlying asset
- Assets held as investments
- Certain regulated leases
In the case of short-term leases, they are defined as having a maximum possible term of 12 months or less, including options to extend. Lessees should instead recognize short-term lease payments as outflows of resources, and lessors should recognize them as inflows of resources.
Tango Lease lets you separate your non-exempt leases from your exempted leases and exception cases that follow separate guidelines, keeping everything organized appropriately and facilitating compliance with GASB 87 standards.
How to do lessee accounting under GASB 87
Under GASB 87, lessees are required to recognize a lease liability and a lease asset at the commencement of the lease term—other than the exemptions and exceptions noted above.
- Calculate the lease liability by taking the present value of payments expected to be made during the lease term, then subtracting any lease incentives.
- Calculate the lease asset by taking the amount of the initial measurement of the lease liability, then adding any payments made to the lessor at or before the commencement of the lease term, as well as certain direct costs.
- Reduce the lease liability as payments are made, and recognize an outflow of resources for interest on the liability. You must also amortize the lease asset over either the lease term or the useful life of the underlying asset—whichever is shorter.
Additionally, GASB 87 requires that you provide the following notes on financial statements:
- A description of leasing arrangements
- The amount of lease assets recognized
- A schedule of future lease payments to be made
In Tango Lease, this whole process is automated for you. We take care of the lease asset and lease liability calculations, reductions, recognitions, and amortizations. And then we auto-generate the required journal entries.
How to do lessor accounting under GASB 87
Under GASB 87, lessors are required to recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term—other than the exemptions and exceptions noted above. Lessors must not derecognize the asset underlying the lease.
- Calculate the lease receivable as the present value of lease payments expected to be received during the lease term.
- Calculate the deferred inflow of resources by taking the value of the lease receivable, then adding any payments received at or before the commencement of the lease term that relate to future periods.
- You must also recognize interest revenue on the lease receivable and an inflow of resources from the deferred inflows of resources over the term of the lease.
Additionally, GASB 87 requires that you provide the following notes on financial statements:
- A description of leasing arrangements
- The total amount of inflows of resources recognized from leases
Due to the way GASB structured their lessor accounting standards, you will have to perform some of these lessor calculations manually, but we’ll walk you through it in Tango Lease. Once those calculations are completed, Tango takes over and auto-generates your journal entries.
How to account for lease contracts with multiple components
Sometimes lease contracts include non-lease components, such as service contracts or Common Area Maintenance (CAM). In these cases, government entities should account for the lease and non-lease components as separate contracts.
Similarly, when lease contracts involve multiple assets, lessees and lessors alike should account for each asset as a separate lease contract.
Where applicable, use the prices stated in the contract to account for each individual component. If the contract does not state individual prices—or if the stated prices seem unreasonable—you may use professional judgment to determine reasonable estimates.
If it isn’t practicable to determine an estimate, or if you’d be unable to provide any justification for where your estimate comes from, you may account for multiple components in a lease contract as a single lease unit.
In airports, for example, multiple gate holders, restaurants, and other businesses will share a common space, which complicates lease accounting. Ideally in such situations, everything will be clearly negotiated in advance to provide clear-cut percentages for CAM charges. But if that isn’t the case, this may be a scenario where trying to make an estimate isn’t practicable, and accounting for the various components as a single lease unit makes more sense.
Whichever way you need to go about it, Tango Lease lets you account for each component in a fully compliant manner.
How to account for lease terminations and modifications
You will account for amendments to the lease contract as either a lease modification or a lease termination, depending on whether the lessee’s right to use the underlying asset decreases:
- If the amendment decreases the lessee’s right to use the asset, then you should consider it to be a partial or full lease termination.
- If the amendment doesn’t decrease the lessee’s right to use the asset, then you should consider it to be a modification.
In the case of a lease termination, you should reduce either the carrying values of the lease liability and lease asset by a lessee or the lease receivable and deferred inflows of resources by the lessor. Then recognize any difference as a gain or a loss.
In the case of a lease modification, you should remeasure the lease liability and the lease receivable. Then adjust the related lease asset by a lessee and the related deferred inflows of resources by a lessor.
Whether a lease termination or a modification, Tango Lease will help you calculate the necessary adjustments, as well as creating associated payment schedules and journal entries.
How to account for subleases and leaseback transactions
In a sublease, the lessee becomes a lessor in order to rent the leased asset to a new third party. When this happens, the lessee of the original lease (now the lessor of the sublease) must account for the original lease and the sublease as separate transactions.
Leaseback transactions come in the form of either sale-leasebacks or lease-leasebacks:
- A sale-leaseback occurs when an entity sells an asset only to lease that asset back from the new lessor.
- A lease-leaseback occurs when an entity leases an asset to a lessee only to lease a portion of that asset back from the lessee, making each party both a lessee and a lessor in their own respective portions.
In the case of a sale-leaseback, you should account for the sale and lease portions of the transaction as separate sale and lease transactions. However, you should report any difference between the carrying value of the capital asset that was sold and the net proceeds from the sale as a deferred inflow of resources as a deferred outflow of resources. Then recognize it over the term of the lease.
In the case of a lease-leaseback, you should account for it as a net transaction. You’ll need to disclose the gross amounts of each portion of the transaction.
In Tango Lease, we’ll walk you through the process, perform the calculations, and create the accounting schedules, keeping you effortlessly in compliance.
How GASB 87 differs from ASC 842 and IFRS 16
GASB 87, ASC 842, and IFRS 16 are all recent lease accounting standards aimed at ensuring leases more accurately reflect an organization’s financial liability. The most significant difference between these standards is whom they apply to.
GASB 87 applies to US government entities and any entity that has a lease agreement with one.
ASC 842 applies to all public and private US companies and nonprofits.
IFRS 16 applies to international companies in 120 countries.
While the general aim of these standards is the same, there are numerous differences in how they account for various scenarios and contracts. For example, GASB 87 and IFRS 16 no longer classify any lease as an “operating lease,” and instead reclassified all leases as “finance leases.” ASC 842, on the other hand, still classifies leases as either finance leases or operating leases, and changes the way operating leases are accounted for.
The Tango Lease advantage for GASB 87 compliance
GASB 87 introduced a host of guidelines and requirements to keep track of, making it crucial to ensure that your lease accounting software is up to the challenge.
With Tango Lease, you get a streamlined process for all your lease accounting management that is fully compliant with GASB 87 regulations, whether you’re a lessor or a lessee (or both). Our software assists with the calculations, creates accounting schedules, auto-generates journal entries, and helps you account for every component of every lease. And Tango stands out from the competition in how we allow you to organize your lease information.
For example, there are a number of cases where GASB 87 requires you to treat different components within a lease as if they were separate lease contracts. With many of our competitors, you would be required to create entirely separate lease records for each component—which is not only unwieldy to manage, but a nightmare when dealing with landlords who want to see everything together. But Tango lets you account for each component correctly while keeping the information together in the same record.
Additionally, sometimes you’ll have lease-related accounting information that you need to keep track of, but which doesn’t need to be included in your disclosure reports. For example, your records of environmental obligations related to a piece of property may be helpful to keep alongside your lease records, but they don’t need to be in the reports. Tango Lease makes it easy for you to store any additional information along with your lease records, while marking it for exclusion from disclosure reports.
Finally, with Tango, you don’t just get software, you get a partner. We’re right there with you throughout the process—providing support, answering questions, and guiding you every step of the way to successful GASB 87–compliant lease accounting.
Ready to see what Tango Lease can do for your organization? Request a demo today.