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What You Need To Know About GASB Lease Accounting Compliance

What you need to know about GASB Lease Accounting Compliance

Generally accepted accounting principles (GAAP) for state and local governments in the U.S. is determined by the private non-governmental organization Government Accounting Standards Board (GASB). GASB standards help government officials demonstrate to their constituents their accountability and stewardship over public resources, including the most recent lease accounting standards for state and local government GASB 87.

What is GASB 87?

The objective of the new lease accounting standard is to create better financial statements that will provide more accurate and transparent information about finances through better accounting and financial reporting.

Similar to ASC 842 for public and privately-owned companies, GASB 87 requires the “recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract.” This lease accounting model is based on the principle that “leases are financings of the right to use an underlying asset, therefore, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities.” (source: gasb.org)

The difference between GASB and FASB lease accounting standards

GASB 87 is not happening in isolation. It is part of a fundamental shift in how all organizations – public, private, nonprofit and governmental organizations – account for leases.

GASB began working on new lease standards after FASB and IFRS, and it’s no coincidence GASB’s lease standard (GASB 87) closely resembles the FASB standard (ASC 842). Both require the majority of leases to move from the footnotes to the balance sheet for greater visibility.

When FASB first introduced its new lease accounting standard, it represented one of the most significant changes in accounting history. For the first time in history, organizations are be required to recognize virtually all lease obligations as assets and liabilities on their balance sheets.

The scope of a GASB 87 project

A portfolio of leases can represent a very diverse range of assets. Real estate leases are very high in value. Equipment leases can be very complex and managed by various product divisions or functional groups rather than a natural owner.  It often requires more time and more people to identify and gather the necessary data for decision-making than anticipated. Most organizations are surprised at the large scope of work represented by identifying, categorizing, tracking and accounting for every lease. Fortunately, government organizations can learn from the best practices (and the missteps) of their predecessors.

See Lessons Learned from recent enterprise lease accounting implementations