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GASB Releases Preliminary Views on Lease Accounting

December 11, 2014

The Governmental Accounting Standards Board (GASB) issued for public comment a Preliminary Views (PV) document on what it believes are the primary issues associated with lease accounting. The document proposes accounting and reporting guidance for both lessors and lessees.

Under the proposal, public colleges and universities that are lessees would report the following in their financial statements for all leases that exceed 12 months in duration:

  • An intangible asset that represents the government's right to use the leased asset.
  • A corresponding liability for lease payments.
  • Amortization expense related to the lease asset (recognizing the asset amount as an expense over the term of the lease).
  • Interest expense related to the lease liability.

Public institutions that are lessors would report the following in their financial statements for all leases that exceed 12 months in duration:

  • A receivable for the right to receive payments.
  • A corresponding deferred inflow of resources to reflect resources related to future periods.
  • Lease revenue (and a corresponding reduction in the deferred inflow) systematically over the term of the lease.
  • Interest revenue related to the receivable.

GASB's Foundational Views

The PV described in the proposal are based on the Board's belief that all long-term leases (e.g., greater than 12 months) are fundamentally financings, and as such create a "right to use" intangible asset. This approach would be less complex than the current model, which requires lessees to classify leases as either capital or operating and requires lessors to classify leases as either sales-type, direct financing, or operating.

The Board's preliminary view is that any contract that meets the definition of a lease should be subject to the guidance in this document, unless the contract meets one of the following scope exceptions:

  • Lease contracts concerning the rights to explore for or to exploit natural resources such as oil, gas, minerals, and similar non-regenerative resources.
  • Leases of biological assets, including timber.
  • Licensing contracts for items such as motion picture films, video recordings, plays, manuscripts, patents, and copyrights.
  • Contracts that meet the definition of a service concession arrangement per GASB Statement 60.

The Board's preliminary view is that contracts that transfer ownership of the underlying asset, and do not contain termination options, should be reported as financed purchases of that asset. Leases that contain a bargain purchase option would also be reported in the same manner. Contracts that contain both lease and service components generally should be separated so that each component is accounted for on its own.

Why GASB is Considering Changing Lease Accounting and Reporting

The Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board to converge the standards for leasing contracts under U.S. GAAP and International Financial Reporting Standards for public companies. The leases project was undertaken because authoritative guidance is based primarily on FASB standards issued through November 1989 (and codified in GASB Statement 62). Because FASB has an active lease accounting project underway, it made sense for GASB to look at its existing lease-accounting guidance to consider whether changes are appropriate.

While both FASB and GASB concur that all leases other than short-term leases should now be on the balance sheet of a lessee, they differ on how expens­es should be recognized. Under GASB's PV on lease accounting, and for a portion of leases under FASB's purview, there would be two different expense components for a lessee: (1) an interest component based on the lease liability and (2) an amorti­zation expense component based on the leased asset. Additionally, FASB has tenta­tively decided not to make signif­icant changes to lessor account­ing. GASB has proposed to change lessor accounting so that it generally mirrors the account­ing proposed for lessees.

Provide Feedback to GASB

GASB is offering several opportunities for its constituents to participate in roundtable exchanges on guidance proposed in the PV. Roundtable testimony will take place April 8-10, 2015, following the public comment due date of March 6, 2015. NACUBO encourages institutions to submit comments to GASB or send feedback to NACUBO for inclusion in the industry comment letter. 

Contact

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail