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Anticipated Changes in Lease Accounting

The Governmental Accounting Standards Board (GASB) issued an exposure draft on January 25, 2016 proposing significant changes in accounting for leases. Primarily the GASB proposal would result in accounting for all lease contracts for nonfinancial assets as capital leases and eliminating the operating lease option. The proposal does not apply to grants, donated assets or leases of intangible assets.

Current standards allow governmental entities to determine if a transaction is a capital lease or an operating lease. This determination is dependent upon whether the transaction meets any of the four conditions set by the GASB that signify a capital lease. In summary, the four conditions denoting a capital lease include the transfer of ownership at the end of the lease term, the lease contains a purchase option at a bargain price, the lease term is equal to or greater than 75% of the estimated economic life of the leased property, or the present value of the lease payments equals or exceeds 90% of the fair value of the leased property. If none of these four conditions are met then the lease can be accounted for as an operating lease.

In general, the GASB’s proposal would eliminate any determination on the part of governmental entities and require the lessee to recognize in their accrual financial statements a lease liability and an intangible asset, which represents the entity’s right to use the leased asset. As the lessor, the government would be required to recognize a lease receivable and a deferred inflow of resources. The proposal was presented at a public hearing on May 31, 2016 and is currently set to become effective for reporting periods beginning after December 15, 2018.

By Aaron Funk