Three Tips for Municipalities Implementing GASB 87
A city’s decentralized nature and diverse operations make it one of the governmental entities most affected by the new leasing standard. Cities engage in leasing activities from both the lessee and lessor side, which doubles implementation efforts.
To implement GASB 87, it’s critical municipalities go beyond the comfortable confines of the accounting and financing departments and reach out to all departments with the ability to enter into leasing agreements (even if they don’t call them “leases”). Here are a few tips to help with implementation. For more help getting started, see BKD’s recent article “Implementing GASB’s Lease Guidance.”
There’s a reason GASB allotted the time it did from the final standard’s issuance to implementation. We’re now within the two-year recommended period for implementation for all governmental entities. Early in the process, cities should educate and train departments on the implications of entering into leasing transactions. Cities also should review and update their policies and procedures and evaluate debt covenants for language that may need to be updated (for example, if they referenced operating and capital leases). Due to the unique terms of indenture clauses and varying legislation, legal counsel may be required to determine if lease obligations are considered debt-for-debt service calculations.
Involve Departments & Define Policies & Procedures Around Leasing
Municipal governments frequently allow various departments to enter into transactions that meet the lease definition under GASB 87. Cities will want to search for leases and provide training to their airport, housing authority, utilities, public safety and public works, to name a few of the highly impacted departments. During this process, you will likely find that your city is entered into leasing transactions you weren’t aware of. Implementing a new standard is a good opportunity to reassess your controls around leasing, define who’s allowed to enter into these transactions and what information needs to flow to finance and accounting when this occurs.
Operationalize Materiality & “Reasonably Certain”
You may not realize this, but each standard contains a caveat that states, “[t]he provisions of this Statement need not be applied to immaterial items.” In addition, the term “reasonably certain” in GASB 87, pertaining to the termination option and options to extend, is a higher threshold than probable and will need to be operationalized. These two areas allow cities to define how the standard will affect financial statement users and help cities avoid spending resources in areas where the cost outweighs the benefit. That being said, municipalities should be careful and consider materiality not only by individual lease but also in the aggregate. If you establish a lease capitalization policy similar to capital assets, be aware the significance of asset capitalization is independent of the assessment of the significance of liability recognition.
GASB 87 is effective for periods beginning after December 15, 2019. Municipalities should consider the three items above, along with various other intricacies in the standard. With any standard as pervasive to an organization as this, municipal governments may want assistance from someone with GASB 87 implementation expertise throughout the transition process.
BKD public sector advisors provide a variety of services to municipal governments across the country and can assist in implementation. If you would like more information, reach out to your BKD trusted advisor or use the Contact Us form below. Additional BKD Thoughtware® is available covering many public sector issues—click here to learn more.