GASB 87 Leases: Implementation Lessons Worth Carrying Forward

GASB Statement No. 87 established a single model for lease accounting based on the principle that leases are financings of the right to use an underlying asset. Lessees recognise a lease liability and an intangible right-to-use asset; lessors recognise a lease receivable and a deferred inflow. The conceptual change was clear. The implementation difficulty was almost entirely elsewhere: entities discovered that they did not know what contracts they had.

The inventory problem

Lease agreements in a public entity are held by whoever signed them. Copiers sit with the office manager, vehicles with fleet, radio tower space with public safety, land with the parks department, and modular classrooms with facilities. Accounts payable knows about the payments but not the terms. Implementation teams that began with a general ledger query for accounts containing "lease" or "rent" consistently found sixty to eighty per cent of what they eventually identified.

The approaches that worked better were unglamorous: a departmental questionnaire with a defined return date and a sign-off from each department head; a review of every recurring payment above a threshold regardless of account coding; and a search of board minutes for contract approvals. The last of these is tedious and unusually productive.

Judgements that recur

Lease term and options

The term includes periods covered by an extension option that is reasonably certain to be exercised, and excludes cancellable periods where both parties have a unilateral right to terminate. Month-to-month arrangements that have run for fifteen years are a persistent judgement point: the history is not itself determinative, but it is evidence about expectation. Document the reasoning, because it will be asked about and because the successor will otherwise have to reconstruct it.

Discount rate

The rate the lessor charges, if determinable — which it usually is not — otherwise the estimated incremental borrowing rate. Entities that issue debt regularly can build a defensible curve from their own recent issuances. Entities that do not should document the reference used and apply it consistently. Changing the rate methodology between years without disclosure invites a question.

Short-term and low-value

The short-term exception applies where the maximum possible term, including all options, is twelve months or less. It is narrower than it first appears: a twelve-month agreement with a renewal option has a maximum possible term exceeding twelve months and does not qualify. GASB 87 contains no low-value exemption; entities applying a capitalisation threshold are exercising a materiality judgement and should document it as a policy rather than treat it as an exemption in the standard.

Variable payments

Payments that depend on an index or rate are included using the rate in effect at commencement. Payments that depend on usage or performance are excluded from the measurement and expensed as incurred. Contracts combining both — common in equipment and facility agreements — need to be split, which is a manual exercise.

Interaction with GASB 96

Subscription-based information technology arrangements are addressed separately under Statement No. 96, but the two populations overlap in practice. Contracts bundling hardware and software — managed print services being the canonical example — frequently contain both a lease component and a subscription component, and the allocation between them requires judgement. Building the two registers simultaneously avoids reviewing the same contracts twice.

What auditors are examining

Based on the pattern of findings since adoption, attention concentrates on: completeness of the population, particularly for embedded leases within service contracts; support for the discount rate; support for option-exercise conclusions; the accuracy of remeasurement following modifications; and note disclosure completeness, particularly the maturity analysis. The first is by a wide margin the most common source of findings, which returns to the inventory problem.

Ongoing operation

Steady-state work is smaller than implementation but is not zero: new leases, modifications, remeasurement triggers, terminations, and the annual disclosure. A quarterly reconciliation between the register and the general ledger, plus a standing agenda item confirming any new agreements, keeps it manageable. Entities that batch all of it into the closing period reliably find something in the last week.