In June 2017, the Governmental Accounting Standards Board (“GASB”) issued Statement No. 87 – Leases which establishes new accounting standards to be applied to all lease transactions for state and local governments. The Standard is effective for fiscal periods beginning after December 15, 2019 with earlier application encouraged.
The governmental standard follows most of the principles established in the new leasing standard issued by the Financial Accounting Standards Board (“FASB”) with some notable exceptions. As with the FASB approach as it pertains to lessees, all leases, except short-term leases, must be recognized on the balance sheet with a lease liability and an offsetting right to use asset. However, short term leases (defined as those leases with a maximum lease term of no longer than 12 months) must use the accounting now in place for operating leases – there is not accounting election that is available.
Most notably, the new GASB standard follows the principle that leases are financings of the right to use an underlying asset. Therefore, with respect to lessees, there is a single amortization method to be applied to the right to use asset which will accelerate expense recognition.
In general, GASB disclosure requirements related to leases are not as onerous as the FASB standard and transition provisions are more flexible.
State and local governments should begin assessing now the extent of their leasing activities and establish a transition plan for implementing the new standard.
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