GASB’s Proposed Lease Accounting Changes
Like their business counterparts, governments routinely enter into leases for vehicles, heavy equipment and buildings. Similar to the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB) wants to change the financial reporting for operating leases. GASB proposes all lease agreements should represent financings and use a single accounting approach. This differs from FASB’s new approach, soon to be issued in a final standard, which maintains the dual-model approach to classifying and recognizing leases.
GASB’s proposed standard, Leases, would require government lessees to recognize a lease liability and an intangible asset representing their right to use the leased asset, with limited exception. Lessees would amortize the leased asset over the term of the lease and recognize interest expense related to the lease liability.
A lessor government would record a lease receivable and deferred inflow of resources. Lessors will systematically reduce the balance of deferred inflow of resources as they recognize lease revenue over the lease term, recognizing interest revenue related to the receivable.
The exposure draft provides exceptions for “short-term” leases lasting 12 months or less, along with financed purchases. The exposure draft wouldn’t apply to donated use of assets or to leases of intangible assets such as patents and software licenses.
Governments would continue providing disclosures related to lease agreements, including a general description of the lease agreement.
GASB intends for the proposed statement to more closely align the financial reporting of lease agreements with the substance of these arrangements—providing for greater transparency and usefulness of the financial statements. FASB soon will issue similar requirements for business entities and not-for-profits but will keep a distinction between leases representing financing agreements and leases classified as operating leases. The differing guidance between FASB and GASB on lease reporting may result in dissimilar financial statement presentation of leases between a government and its component unit(s) reporting under the FASB framework.
The deadline for written comments on the exposure draft is May 31, 2016. The requirements of the proposed statement would be effective for reporting periods beginning after December 15, 2018, with earlier application permitted.