Other lease-specific factors can be addressed here. Also considered would be the timing of payments – such as any prepayments or if the payment amount decreases/increases over time. Generally, the longer the term, the higher the rate. For governments without outstanding debt or debt that is not publicly traded, a risk-free rate may be the only starting point.Ģ) Financing Adjustments: A government would need to adjust the base rate to reflect credit-specific factors such as the overall level of indebtedness or if the lease results in a change to leverage ratio, which would warrant a higher incremental borrowing rate.ģ) Lease-Specific Adjustments: These would include the term of the lease agreements. The starting point may be based on debt already outstanding (a recent line of credit or short term loan). Below is an example framework to calculate a government’s incremental borrowing rate:īase Rate + Financing Adjustments + Lease-Specific Adjustments = Incremental Borrowing Rateġ) Base Rate: The first step is to establish an appropriate base rate, which will then be updated for financing adjustments and lease specific adjustments. Under GASB guidance, each lease could have a different discount rate, which needs to be supported with appropriate documentation. Unlike FASB, the GASB lease guidance does not offer a practical expedient to apply an appropriate discount rate to a portfolio of similar leases. What incremental borrowing rate do I utilize?įor lessor arrangements, determining the incremental borrowing rate (IBR) has not been crystal clear. Thus, in instances in which an internal service fund is used to provide other departments/governmental funds the right to use an asset on a cost-reimbursement basis, the agreements should not be reported as a lease in the basic financial statements. The definition of a lease requires the conveyance of control of the right to use another entity’s nonfinancial asset. What if I have an Internal Service Fund that “owns” assets the Government utilizes? If applied to earlier periods, leases should be recognized and measured using the facts and circumstances that existed at the beginning of the earliest period restated.” Thus, in instances in which a lease is in place for less than 12 months during the period of implementation, with no options to extend, the lease should be considered a short-term lease. The GASB Statement states that “leases should be recognized and measured using the facts and circumstances that existed at the beginning of the period of implementation. This is key when also reviewing current agreements that end in the year of implementation. Thus, if an agreement is for the right to use the nonfinancial asset for only 3 months each year for 3 years (a maximum possible term of 9 months), the maximum possible term of the agreement is less than 12 months, and the agreement meets the short-term exception requirements.

The short-term exception (or relief from the new standard) defines short-term leases as a contract with a maximum possible term, including any options to extend (regardless of whether the options will be exercised), of 12 months or less these contracts do not need to be accounted for as leases.

There is an exception for short-term leases. A restatement to the beginning financial statement balances is going to be dependent on the impact of GASB 87 on each government and should be made on a case by case basis. This means that previously classified operating leases will now be reported on the Fund Financials and Government-Wide Financial Statements. In most situations, but not all, the following will occur: previously reported capital leases will now be reported as financed purchases and previously reported operating leases will now be reported as leases. If this is your first introduction to the new lease standard, please refer to Christopher Heinfeld’s 2021 article for a basic introduction to the GASB pronouncement.īelow are some key items and commonly asked questions to be aware of as you go to record the lease transactions, prepare the financial statement footnotes, and review said items before your annual audit gets started. There is no time left to procrastinate on preparing to implement GASB Statement 87. GASB Statement 87, Leases: Common Implementation Questions by Joshua Jumper, CPA, CGFM, Audit Manager

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