GASB-87: New Guidelines to Stay Compliant

Initially scheduled to go into effect almost a year and a half ago, Governmental Accounting Standards Board (GASB) Statement 87 was postponed for 18 months due to the COVID-19 pandemic.  With the new effective date of June 15, 2021 fast approaching, though, it is now crunch time for government agencies that want to ensure compliance with GASB-87 and the new lease accounting standards that it requires.

GASB-87 was largely written to create more transparent reporting of lease agreements in an entity’s financial statements. The biggest takeaway from the new guidelines that GASB-87 establishes is the fact that local government agencies will not be able to treat operating leases as a period rent expense once GASB-87 goes into effect.

For lessees, this means that lease liabilities will now be recognized and measured at the present value of payments expected during the lease term and that right-of-use asset values will be required to match the initial measurement of the lease liability after this measurement has been adjusted for prepayments to the lessor, initial direct costs, and incentives paid by the lessor to the lessee.

For lessors, GASB-87’s new guidelines mean that they will be required to recognize and measure lease receivables equal to the present value of the lease payments that are expected to be received over the lease term. It also means that the deferred inflow of resources equal to the lease receivable will need to be recognized as revenue throughout the lease term.

As governments scramble to ensure compliance with these new standards,  several best practices can be put to use in order to improve the process of meeting GASB-87 compliance. These best practices include automating the lease accounting process, making use of better reporting and analytics to measure progress, and leveraging lease accounting software. While it is all but guaranteed to be a challenge for many if not most government entities, compliance with GASB-87 is soon to be a requirement, and a well-developed compliance strategy is a necessity to foster a successful transition.