The Governmental Accounting Standards Board has published updated implementation guide for its standard on leases, which will come into effect soon, as well as other accounting standards for state and local governments.
The updated guidelines, released by the GASB last week, provide information in the form of questions and answers on a variety of topics, including accounting and financial reporting for derivatives, fiduciary activities, benefit plans , non-exchange transactions, capitalization policies, income from fines, capital, project funds and other matters. A large part is devoted to the rental standard, GASB 87 statement.
Last year, the GASB voted to postpone the effective date of the lease standard, along with other standards, for state and local governments, to give them more time to adjust. during the COVID-19 pandemic (see the story), delaying it by 18 months from December 15, 2019. But now the effective date will arrive shortly, for fiscal years beginning after June 15, 2021 and all reporting periods thereafter, according to GASB 95 statement. This is also true for the implementation guide, which provides details on defining a lease, reassessing the lease term, short-term leases, transfer of ownership contracts, accounting and leasing. lease valuation, rental inducements, lease modifications and terminations, and other matters.
This does not mean that the deadline is in a few days, however. “GASB 87 will come into effect after a delay for entities with a fiscal year end after June 15, 2021, so for entities with a fiscal year end beginning July 1 – an example would be school districts, which is a special purpose government entity, and there are 13,000 of them in the country – they will have to meet that standard for the next fiscal year, ”said Joe Fitzgerald, senior vice president of rental market strategy at Visual Lease, a rental accounting software company.
While there is still time to prepare, state and local accountants should not wait any longer to apply the new standard. “If they fail to get all of this in order before the deadline, they will likely face challenges on their journey towards rental accounting compliance and maintaining it afterwards,” said Fitzgerald. “A little preparation ahead of time can help organizations align their strategy and schedule. to start. However, now that we are getting closer to the deadline, there are other things that they should also consider doing in parallel: Analyzing the data collected and reviewing the results of the reports is one of the steps. final, but essential, to ensure compliance. Major reports to pay attention to include Disclosure Report, Journal Entry Report, and Tracking Reports, which are critical numbers that will enable companies to successfully comply with GASB 87.
Like the Financial Accounting Standards Board’s lease standard, the GASB version will also put operating leases on the balance sheet for the first time for many entities.
“ASC 842, which is the standard that the FASB published and came into effect for publicly traded companies and which will come into effect for private companies from 2022, is very similar,” Fitzgerald said. “Government entities have had a large portion of their leases off-balance sheet as tenants, and starting with the new standard, they will incorporate these new leases on their balance sheets. They will effectively go from the current rental accounting, which is GASB 13, to GASB 87, and they will recognize an asset and a liability, which are more or less equal, but there will be what they call a “right to”. use asset ”on the balance sheet, starting on the first of their fiscal year – July 1 in this case – and they will recognize a corresponding liability. This will roughly reflect the net present value of future minimum lease payments over the term as defined in the standard. “
State and local government balance sheet liabilities are set to increase, and this will attract the attention of rating agencies. “These balance sheets are going to explode indeed, and that could impact various things, one of which is that many government agencies have credit scores, so this is going to create additional liability on their balance sheets,” Fitzgerald said. “They are going to have to think about it, what it is going to mean and how they are going to be assessed by the rating agencies.”
Some rating agencies have already taken into account the bonds even though they were off-balance sheet. “Even though they had been off-balance sheet before, there is a disclosure in the footnotes that one could consult to review your future lease obligations and then interpret that based on the impact on your financial statements. “said Fitzgerald. “In theory, that shouldn’t affect him, unless it turns out you’re far away.”
When public companies had to reveal significant discrepancies between their footnotes regarding their lease obligations under ASC 842, they had to explain why. So when something isn’t part of the balance sheet, there isn’t as much scrutiny and attention to detail. “We saw a number of publicly traded companies that thought their lease obligation was X and it turned out that at the time of their balance sheet it was a multiple of that. Then you had some explaining to do, ”Fitzgerald said.
He also advises government accountants to watch out for the “day one transition”.
“The other thing about lease accounting is that now that it’s on the balance sheet, changes to your leases, which happen quite regularly – more than people realize – will have to be evaluated.” , Fitzgerald said. “For example, if you had a three-year lease and you changed it along the way to a five-year lease, you actually have to look at the amendment and there may be a subsequent assessment of that lease. Or for a new lease you have to take a closer look at it than in the past because it was off balance sheet and people didn’t pay as much attention to it.
Another lesson governments can learn from SOEs that applied FASB’s ASC 842 standard during the pandemic is lease renegotiations. “We’ve seen with publicly traded companies that have adopted their own standard, during COVID-19 there was a lot of renegotiation around the leases,” Fitzgerald said. “Everyone was looking for relief. One thing they did was they went to their landlords to get some relief, so there have been a lot of land leases that have been changed. Some of these changes could have resulted in write-downs or terminations of leases, and they should be assessed for recognition, whereas in the past they may have been. [treated] much more casual because there would have been no impact on the balance sheet.
For publicly traded companies that adopted the ASC 842 rental standard and put the right of use on their balance sheets, there were valuation issues around the asset that is now on the books. For government entities, after adopting GASB 87, if they have any changes to their leases, it could result in a new lease.
Technology will be an important consideration. “There has to be a lot of precision in terms of what data is being collected and captured, and how quickly that data is updated in some kind of technology platform so that accountants and financiers can assess it for lease accounting. Says Fitzgerald. “In the past, it was more simply through their income statement, through their accounts payable. “
Changes in lease accounting may cause some government entities to consider buying rather than leasing assets, as the assets will appear on the balance sheet with GASB 87 anyway, as has happened with some state-owned enterprises. who have adopted ASC 842.
“Maybe they’re starting to move more toward buying rather than renting,” Fitzgerald said. “I’ve seen situations where entities have many large equipment portfolios and started to assess whether leasing is in fact the right answer for them. Upstream, you leave with an idea of leasing, then what happens is that you do not return the equipment on time, for example. So whatever negotiation you have done upstream to get the best rate and term, once you start getting into what’s called the evergreen period, you’ve kind of missed everything. the hard work you did upstream to get the best deal on the lease, so I’ve seen companies assess if they should buy things.
An example could be the rental of vehicle fleets. “We started to see companies that might be considering starting to buy their fleet vehicles because they actually held them well beyond their term. The other area I saw was in computer equipment, especially laptops, ”Fitzgerald said. “A large public company has a large portfolio of laptops, and they admit that maybe they should just buy them because they don’t necessarily keep them for three or two years, or whatever the deal. But the other reason is that leasing requires much more tracking of assets, and many companies have recognized how difficult it is to track them and know where to get them back, so they were buying, not necessarily at the best. rental rate, but fair from a resource point of view. So I would expect to see some of that as government entities start to put this on the balance sheet. But that must first appear in the balance sheet to arrive at some of these achievements. “
Government entities must face these decisions and prepare to implement the changes. “We see a lot of government entities with a June 30 year-end,” Fitzgerald said. “In theory, all of these entities should have prepared for this standard now or even before today. We don’t see that many government entities in the market right now, but we’re starting to see them more and more. I think they’re going to start taking care of this as they get closer to the end of the year which will create complications because then they’ll have to, in effect, have to reshuffle the rental activity that’s happening in the during their next fiscal year for these modifications and changes to their leases.