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Business and Policy Areas
Business and Policy Areas

Comment Deadline Approaching for GASB Lease Proposal

May 16, 2016

The Governmental Accounting Standards Board (GASB) issued an exposure draft in February addressing leasing transactions of governmental organizations. GASB is proposing a new accounting model for both lessees and lessors that would eliminate the current distinction between operating and capital leases. The proposal would apply to contracts that convey the right to use an underlying asset for a period of time in an exchange or exchange-like transaction. It would not apply to donated use of assets or to leases of intangible assets (such as patents and software licenses).


Lessees would report an intangible lease asset that represents the public institution’s right to use the underlying asset. The initial measurement is based on the lease liability, which is the present value of future lease payments. Amortization expense would be recognized over the life of the lease term and reduce the value of the “right to use” asset. Interest expense representing the financing activity would decrease the lease liability.

For financial reporting, amortization expense can be combined with depreciation expense, and interest expense would be considered a non-operating financing expense. The “right to use” assets and related liabilities can be presented as part of “net investment in plant” within net position.

Lessees would disclose information about leases separately from capital assets and provide general descriptions by type of arrangement that include basis, terms, conditions, and residual guarantees. Lease asset totals, accumulated depreciation, and principal and interest requirements to maturity, for each of the five subsequent fiscal years and in five-year increments thereafter would also be required disclosures.


Public institution lessors would report a receivable for the right to receive payments, initially measured based on the present value of future lease payments to be received, and a corresponding deferred inflow of resources, measured at the initial value of the lease receivable. Over the life of the lease, the receivable is reduced and interest revenue is recognized. Additionally, lease revenue would systematically offset the deferred inflow of resources throughout the lease term.

A lessor would disclose in the notes to the financial statements general descriptions of leasing arrangements—by major asset class—including basis, terms, conditions, carrying amount, and accumulated depreciation. Inflows and outflows of resource totals would be disclosed if the amounts are not displayed on the face of the financial statements.

Short-term Leases

The proposal defines leases with a maximum possible term of 12 months or less, including any options to extend, as short term. With short-term leases, lessees recognize rent expense and lessors recognize rental income.

Impact on Higher Education

If adopted, the proposed guidance would lead to another accounting and reporting difference between public and independent higher education institutions, potentially hampering comparability. In addition, amounts currently reported as rent expense would instead be shown as interest expense and amortization expense. This may create issues for research institutions that are subject to Office of Management and Budget (OMB) compliance requirements.

The standard would be effective for reporting periods beginning after December 15, 2018 (FY20 for the vast majority of public colleges and universities). Early adoption would be permitted. Comments on the proposal are due May 31. Institutions should consider providing feedback to NACUBO for inclusion in the industry comment letter, or responding directly to GASB.


Sue Menditto
Director, Accounting Policy