GASB Proposes Lease Relief & Other Implementation Help
At least annually, GASB issues an implementation guide to help governments adopt new accounting standards or provide guidance on existing standards. GASB is currently soliciting feedback on its 2020 edition, which primarily addresses unresolved questions on Statement 87, Leases. This year’s proposed guidance includes 13 new lease items (in addition to the Lease Implementation Guide issued in August 2019, which addressed 77 issues).
Comments are due January 31, 2020, and the final guide is scheduled for release in April 2020.
Lessor Discount Rate
Statement 87 notes that lessors have information to determine the interest rate they charge the lessee—including implicit rates—and should use this rate to discount the future lease payments. Many government contracts do not include a stated interest rate. While GASB 87 provides an alternative to an “implicit interest rate” for lessees, no such alternative or guidance is currently provided to lessors.
The proposed guidance notes that in the absence of a stated rate, the lessor should determine whether the rate implicit in the lease can be estimated. Lessors may use professional judgment to determine their best estimate for the interest rate, maximizing the use of observable information, e.g., using the lessee’s estimated incremental borrowing rate or published market rates for similar instruments.
If it is not practicable for the lessor to estimate the discount rate through those methods, the lessor’s own incremental borrowing rate may be used.
Regulated Leases – Marine Terminals
Leases that are subject to external laws, regulations or legal rulings qualify for exemption from Statement 87’s recognition and measurement requirements if they meet the following criteria:
- The lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator
- Lease rates are similar for lessees that are similarly situated
- The lessor cannot deny potential lessees the right to enter a lease if facilities are available, provided that the lessee’s use of the facilities complies with generally applicable use restrictions
The proposed implementation guide clarifies the third bullet item is met for a marine terminal operator as defined by the Federal Maritime Commission and covered by the U.S. Shipping Act.
Other Lease Items
The proposed guide includes five questions/examples related to lease term and reassessment, three questions on lease definition and control, two questions related to lease incentives and one question on accounting for payments made during the construction period.
Technical Correction – Interim Effective Date
In early February, GASB will release a set of technical corrections updating the effective date for the lease statement for interim periods. As originally issued, Statement 87 was applicable for reporting periods beginning after December 15, 2019. Some governments issue quarterly financial statements and would have been forced to implement lease changes nine months earlier than governments issuing annual reporting statements. The new effective date will be effective for fiscal years beginning after December 15, 2019. Once effective, the change is applicable to all reporting periods thereafter.
Other topics addressed in the proposal include:
- Fiduciary Activities (Statement 84, effective for reporting periods beginning after December 15, 2018)
- Three examples covering seized assets and administrative involvement
- Resource: Changes to Government Reporting of Fiduciary Activities
- Financial Reporting Entity – The guide answers two questions on fiscal dependency, which could affect whether an activity is subject to Statement 84
- Conduit Debt (Statement 91, effective for reporting periods beginning after December 15, 2020)
- Issuance fees. Issuance fees paid to a government directly from debt proceeds should not alter the conduit debt assessment. This flow is for convenience, and the third-party obligor or its agent ultimately receives the proceeds from the debt issuance as one of the criteria for conduit debt.
- Appropriation intercepts. An appropriate intercept by itself would not constitute an additional or voluntary commitment. An additional or voluntary commitment requires an issuer to use its own resources to support debt service payments when the third-party obligor is—or will be— unable to do so. If the redirection of appropriations is an administrative function and not due to repayment uncertainty, the intercept mechanism would not constitute an additional or voluntary commitment.
- Termination purchase options. Lease accounting does not change until the option is exercised. At exercise, if the third-party obligor had exclusive use of the entire capital asset during the arrangement, the issuer would recognize an inflow of resources for the purchase price. If the third-party obligor had exclusive use of portions of the capital asset during the arrangement, the issuer would derecognize the capital asset and recognize an inflow or outflow of resources, as appropriate, for the difference between the capital asset’s carrying value and the purchase price received.
- Resource: GASB Issues New Conduit Debt Rules
- Investments/Investment Pools – Reporting internal portion of investment pools
- Asset Retirement Obligations (Statement 83, effective for reporting periods beginning after June 15, 2018)
- Clarifies that all obligations for asbestos removal are within the scope of Statement 49 rather than Statement 83
- Resource: GASB’s Asset Retirement Guidance
The exposure draft also includes amendments to previously issued questions and answers relating to pension accounting, financial reporting for certain investments and external investment pools and other post-employment benefits reporting.
BKD has prepared a library of BKD Thoughtware® on public sector accounting. Visit our website to learn more. If you have questions about these changes, contact your BKD Trusted Advisor™.