accounting for leases under the new standard · 2020. 4. 28. · accounting for leases under the...

Government Finance Officers Association

Accounting for Leases under the New

Standard

Webinar January 10, 2019

Agenda

• Background• Definition and scope• Lease term• Short-term leases• Lessee accounting and financial reporting• Lessor accounting and financial reporting• Variations on lease contracts

2

Background

GASB Statement No. 87, Leases, revises existing standards on lease accounting and financial reporting (primarily Statement No. 62)• Issued June 2017• Effective for periods beginning after December

15, 2019 • Earlier application is encouraged• COD section L20 - Leases

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Why is this a big deal?

Definition of leases has changed• “Capital” and “operating” lease terminology goes

away Must evaluate all current leases and contracts

to determine if they meet the GASB 87 definition of a lease• Leases previously not reported because they were

operating, may now need to be added to the financial statements

Standard is to be applied retroactively

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Why is this a big deal? (cont.) Existing leases must be measured and recognized

based on facts and circumstances of the lease in the period of implementation of GASB 87, not inception of the lease.

If administration of leases is decentralized across your organization, may be difficult to determine what contracts are subject to the new lease accounting.

While net position generally unaffected (lease debt offset by intangible lease asset), the increase in reported debt for lessee governments that currently have operating leases may impact debt limits, covenants, and statutes.

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GASB Statement No. 87

Establishes single model for lease accounting• Underlying foundation - leases are financings Leases no longer classified as operating or

capital Exceptions for lessors and lessees

• Short-term leases• Contracts that transfer ownership and do not

contain termination options

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Definition of a Lease7

A contract that conveys control of the

right to use

another entity’s nonfinancial asset

(the underlying asset)

as specified in the contract for a period

of time

in an exchange or exchange‐like transaction

Common nonfinancial assets that are leased• Land• Buildings• Vehicles• Equipment

Definition of a Lease (continued)

Control requires both of the following:• (1) the right to obtain the present service capacity from use of the

underlying asset, and • (2) the right to determine the nature and manner of use of the

underlying asset

Control applied to the right-to-use lease asset (a capital asset) “specified in the contract”• Control criteria NOT limited to contracts that convey substantially all of

the present service capacity from use of the underlying asseto Right-to-use lease assets include rights to use underlying assets for

portions of time, such as certain days each week or certain hours each day

Includes contracts not explicitly defined as “leases”, but that otherwise meet the definition

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Exclusions from Scope of Leases9

Intangible assets (mineral rights, patents, copyrights, computer software), except for thesublease of an intangible right-to-use asset

Biological assets (including timber, living animals, and living plants

Inventory

Service concession arrangements (see GASBStatement No. 60, paragraph 4)

Exclusions from Scope of Leases (continued)

Assets financed with outstanding conduit debt, unless both the asset and the conduit debt are reported by the lessor

Supply contracts (such as typical power purchase agreements, which do not convey control of the rightto use the underlying power generating facility)

Contracts for services, except those contracts thatcontain both a lease component and a servicecomponent

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Exclusions from Scope of Leases (continued)

Certain regulated leases (airport-airline agreements)

Leases of assets that are reported as investments (meets requirements of GASB No. 72 to be reported at fair value)

Leases that transfer ownership and do not contain termination options

$1 Leases

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Lease Term12

Noncancelable period during which lessee has right to use the underlying asset

Any periods in which the lessee or the lessor has the sole option to

extend lease, if reasonably certain the

option will be exercised by that party

Any periods in which the lessee or the lessor has the sole option to terminate lease, if

reasonably certain the option will not be

exercised by that party

Lease Term

Lease Term

• Ignores fiscal funding or cancellation clause, unless reasonably certain the clause will be exercised

• Excludes cancelable periods – Periods for which both lessee and lessor have an option to terminate lease without permission from the other party (or if both have to agreed to extend)

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Reassess Lease Term 14

Reassess lease term only if one or more of the following occurs:

Lessee/lessor decides to exercise option that

was not originally deemed reasonably

certain to be exercised

Lessee/lessor decides not to exercise option that was originally deemed reasonably

certain to be exercised

An event specified in contract that requires

an extension or termination has taken

place

Short-Term Lease Exception

Short-term lease• At inception, has a “maximum possible term” of 12

months or less, including any options to extend, regardless of the probability the options will be exercised

A lease that is cancelable by either party, such as month-to-month or year-to-year lease, the maximum possible term is the noncancelableperiod, including any notice period

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Accounting for Short-Term Leases

Lessee Lessor

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Recognize lease payments as expenses/

expenditures; asset for advance

payments (prepaid); liability

for rent due

• No recognition of expenditure/expense and revenue during rent holiday• No required note disclosures

Recognize lease payments as

revenue; liability for advance

payment; asset for rent due

EXAMPLEWhat is the Lease Term under GASB 87?

“This Agreement commences on the first date the Equipment is accepted by the lessee, and ends on the later of the last day of the Minimum Lease Term (“Term”) of ten months, or the Extension Period (as herein defined). At the end of the Term, this Agreement is extended on a month-to-month basis until the Equipment is returned to the lessor (the “Extension Period”). During the Extension Period the lessor has the right to, on 15 days notice, increase the rate per month . . . . After the end of the Term either party can terminate this Agreement on 15 days written notice.”

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“The lessor agrees to lease the vehicle to the lessee for an Initial Term beginning on January 1, 2018 and ending on December 31, 2022. The lessee has the option to renew the lease for five additional years. The lessee shall exercise the option to renew by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term.”

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“The lessor agrees to lease the vehicle to the lessee for an Initial Term beginning on January 1, 2018 and ending on December 31, 2022. The lessee has the option to renew the lease for five additional years. The lessee shall exercise the option to renew by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term.” The lessor or lessee may terminate this lease at any time, with five (5) days written notice.

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“The lessor agrees to lease three floors of a building to the lessee for an Initial Term beginning on September 1, 2018 and ending on August 31, 2026. The lessee has the option to renew the agreement for two (2) additional years by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term. The lessee may terminate the agreement any time after August 31, 2023 with written notice to the lessor at least ninety (90) days prior to termination.”

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21

Assets Liabilities Deferred Inflow of Resources

Lessee Intangible (right‐to‐use) lease asset equal to the value of lease liability + lease prepayments made for future periods + any direct ancillary costs necessary to place asset into service (not debt issuance costs)

Present value of future lease payments expected to be made during lease term (includes fixed payments, variable payments based on rate or index, reasonably certain residual guarantees, other reasonable certain payments)

Lessor Lease receivable (generally includes same amounts as lessee liability)Continue to report leased asset (capital asset)

Equal to lease receivable + any prepayments received for future periods

Initial Recognition - Overview

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Assets Liabilities Deferred Inflow of Resources

Lessee Amortize intangible right‐to‐use asset in rational and systematicmanner over shorter of useful life of the underlying leased asset or lease term, unless a purchase option that is reasonably certain to be exercised. Then, amortize over useful life of underlying asset.

Reduce liability for actual lease payments, less amounts for interest expense

Lessor Reduce receivable for actual lease payments received, less amounts for accrued interest

Depreciate leased asset (unless indefinite life or requirement to be returned in its original or enhanced condition)

Recognize leaserevenue in a rational and systematic manner over the lease term

Subsequent Reporting - Overview

LESSEEAccounting and Financial Reporting

23

LESSEERecognition and Measurement

At commencement of lease term Economic resources measurement focus (full accrual)Recognize a liability for present value of future lease payments and an intangible right-to-use asset (the leased capital asset)DR Intangible right-to-use lease asset

CR Lease liability

Current financial resources measurement focus (modified accrual)DR Expenditures – capital outlay

CR Other financing sourcesTo record capital expenditure and related financing from lease

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25

Lease Liability

Fixed lease

payments

Certain variable payments

Purchase options

Residual value

guarantees

Termination penalties

Any other reasonably certain

payments

LESSEEInitial Measurement

LESSEEInitial Measurement (cont.)

Lease liability • Does not include lease payments dependent

on lessee’s future performance or usage of underlying asset

• Discount future lease liability payments

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Discount Rate

Interest rate charged by lessor (may be implicit in the agreement), or Lessee’s own borrowing rate (if interest rate

cannot be readily obtained)

27

Rate implicit in the lease agreementSum of the present value of lease payments + present value of any unguaranteed residual value

Sum of the fair value of underlying asset + any initial direct costs incurred by lessor (registration, legal, transportation, etc.)

What are Lease Incentives?

Payments made to, or on behalf of, the lessee for which the lessee has a right of offset with its obligation to the lessor

Or other concessions granted to the lessee• Rebates/discounts• Assumptions of preexisting lease obligations to a third-

party• Other reimbursements of lessee costs• Rent holidays• Reductions of interest or principal charges by the lessor

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How Do We Account for Lease Incentives?

Payments provided to, or on behalf of, lessee at or before commencement of lease term• Include in initial measurement as a reduction of right-to-use

asset Payments provided after commencement of lease term

• Reduce lease payments for periods in which incentive payments will be provided

• If incentive payments are fixed or fixed in substance oInclude in initial measurement or remeasurement as a reduction of

right-to-use asset• If variable or contingent lease incentive payments

oDo not include in initial measurement of right-to-use asset

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Example #1 – Government is Lessee 30

Assumptions: Government enters into a five-year lease for capital equipment

(60 months) on April 1. Monthly payments of $1,000 are due on the first of every month.

Total monthly payments = $60,000. First payment due on April 1. Government has the option to purchase equipment for $2,000 at

end of lease term, that it is reasonably certain they will exercise. Payment must be made 30 days before end of lease term.

Government incurs transportation costs of $2,500 to get equipment ready to place into service.

Government estimates the useful life of the equipment at seven years (84 months).

Annual interest rate charged on lease is 3%. Government’s fiscal year end is December 31.

Step 1 – Calculate the Lease Liability

Lease liability = present value of future payments expected to be made over lease term (present value of monthly payments + present value of $2,000 purchase payment at end)• Present value of $1,000 monthly payments = $55,791

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Rate = Interest rate per period (3%/12)Nper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made at beginning of period

Step 1 – Calculate the Lease Liability (cont.)

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Present value of $2,000 purchase payment at end = $1,725

Present value of lease liability to recognize is $55,791 + $1,725 = $57,516

Rate = Interest rate per period (3% annual)Nper = Total number of payment periods (5 years)Pmt = Payment made each periodFv = Future valueType = 1 (payment made in last month of

lease)

Step 2 - Calculate Amortization of Discount on Lease Liability

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amortization of lease paymentsAnnual interest rate 3.00%monthly rate 0.0025periods 60 Payment per year 12 Amount 55,791$ Payment 1,000$ =PMT(.0025,60,‐55791,0,1)

Payment Number Payment Interest Principal Balance57,516$

1 1,000$ ‐$ 1,000$ 56,516 2 1,000 141 859 55,657 3 1,000 139 861 54,796 4 1,000 137 863 53,933 5 1,000 135 865 53,068 6 1,000 133 867 52,201 7 1,000 131 869 51,332 8 1,000 128 872 50,460 9 1,000 126 874 49,586

The $1,000 monthly payment is based on the present value of $60,000 due over the 60 months of the lease. Since the lessee government is also liable for the $2,000 purchase option due on the 60th month, the total lease liability to amortize at inception is $57,516.

59 1,000 10 990 2,993 60 3,000 7 2,993 ‐

The final $3,000 payment represents the $1,000 payment due for the 60th month, plus the $2,000 purchase option due at the end of the lease term.

$56,516 x .0025

Payment ‐ Interest

Step 3 – Calculate the Intangible Right-to-use Lease Asset

$ 57,516 lease liability+ 2,500 transportation costs to place

asset into service$60,016 intangible right-to-use lease asset

to record

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Step 4 – Calculate Amortization of Intangible Right-to-use Lease Asset

amortization of lease assetLease asset value 60,016$ Useful life (months) 84 Monthly amortization 714$ Annual amortization 8,568$

Month Number Amortization Balance60,016$

1 714$ 59,302 2 714 58,588 3 714 57,874 4 714 57,160 5 714 56,446 6 714 55,732 7 714 55,018 8 714 54,304 9 714 53,590

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Amortize asset in rational and systematic manner over shorter of life of underlying leased asset or lease term, unless purchase option that is reasonably certain to be exercised. Then, amortize over useful life of underlying asset.

If Lease Paid from a Governmental Fund

Journal entries – April 1General fund

DR Expenditures – capital outlay $57,516CR Other financing source-

inception of lease $57,516To record capital expenditure and related financing from lease of equipment

DR Expenditures – capital outlay $ 2,500CR Cash $ 2,500

To record expenditure for transportation costs to place asset into service

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If Lease Paid from a Governmental Fund

Journal entries – monthly lease payments

General fund

On December 31 – Total of 9 months lease payments

DR Expenditures – debt service principal $7,930DR Expenditures – debt service interest $1,070

CR Cash $9,000To record monthly lease payments based on amortization of lease payments schedule.

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Year-end Adjustments for Government-wide Statements

DR Intangible right-to-use lease asset $60,016CR Expenditures – capital outlay $60,016

To recognize lease asset

DR Other financing source –inception of lease $57,516

CR Lease liability $57,516To recognize lease liability

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Year-end Adjustments for Government-wide Statements (cont.)

DR Lease liability $7,930CR Expenditures – debt service principal $7,930

To recognize monthly lease payments for principal

DR Amortization expense $6,426CR Intangible right-to-use lease asset $6,426

To amortize intangible right-to-use lease asset over the useful life of the underlying asset

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Summary of Transactions

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General Fund Transactions DR/(CR) Gov't‐wide adjustments DR/(CR)Entry # 1 2 3 4 5 6 7

Inception of lease

exps to get asset in place

debt service pmts

Total General Fund

Recognize lease liability

Recognize lease asset

Lease principal pmts

Asset amortization

Total Gov't Wide

Consolidated totals, accrual

Cash (2,500) (9,000) (11,500) ‐ (11,500) Lease asset (intangible right‐to‐use) ‐ 60,016 (6,426) 53,590 53,590 Lease liability ‐ (57,516) 7,930 (49,586) (49,586) Expenditures ‐ capital outlay 57,516 2,500 60,016 (60,016) (60,016) ‐ Expenditures ‐ debt service principal 7,930 7,930 (7,930) (7,930) ‐ Expenditures ‐ debt service interest 1,070 1,070 ‐ 1,070 Other financing source ‐ inception of lease (57,516) (57,516) 57,516 57,516 ‐ Amortization expense ‐ 6,426 6,426 6,426

net ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Entries 1, 2, 4, 5 are made at the inception of the lease

Entries 3, 6, 7 represent the total amount of monthly payments made in the fiscal year.

If Lease Paid from a Proprietary Fund

Journal entries – April 1Enterprise fund

DR Intangible right-to-use lease asset $60,016CR Lease liability $57,516CR Cash $ 2,500

To record leased right-to-use asset, related liability, and payment of transportation costs to place asset into service

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Journal entries – monthly paymentsProprietary funds

On December 31 – Total of 9 months lease payments and amortization expense

DR Lease liability $7,930DR Expense – debt service interest $1,070

CR Cash $9,000To record monthly lease payments based on amortization of lease payments schedule.

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Journal entries – monthly payments (cont.)

Enterprise fund

DR Amortization expense $6,426CR Intangible right-to-use lease asset $6,426

To amortize intangible right-to-use lease asset over its useful life

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LESSEE—Disclosures

1. General description of leasing arrangementsa. Basis, terms, and conditions, on which variable lease

payments not included in lease liability are determined b. Existence, terms, and conditions, of any residual value

guarantees provided by the lessee2. Total amount of assets recorded under leases with the

related accumulated amortization; disclosed by major class and separately from other capital assets

3. Variable lease payments recognized during the period that are not included in lease liability

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LESSEE—Disclosures (continued)

5. Other payments recognized during the period that are notincluded in lease liability (such as residual value guarantees or penalties)

6. Maturity analysis of all future lease payments a. Payments for each of the first five yearsb. Payments in five-year increments thereafterc. Display principal and interest separately

7. Lease commitments, other than short-term leases, for which the lease term has not yet begun

8. Components of any loss associated with an impairment (gross impairment loss less any related change in lease liability)

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LESSEE – (Example)Note Disclosure

The government entered into a five-year lease for capital equipment on April 1, 2018. Monthly payments of $1,000 are due, with the first payment made on April 1, 2018. The government has the option to purchase the equipment for $2,000 at the end of the lease term, which it is reasonable certain it will exercise. The estimated useful life of the equipment is seven years. The annual interest rate charged on the lease is 3%.

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LESSEE (Example)Capital Assets Note Disclosure

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Beginning Balance Increases Decreases Ending Balance

Capital assets not being depreciated Land 11,249,368$ ‐$ (5,872)$ 11,243,496$ Construction in progress 5,490,822 2,890,542 (1,675,307) 6,706,057 Total capital assets not being depreciated 16,740,190 2,890,542 (1,681,179) 17,949,553

Other capital assets Buildings and improvements 225,636,411 19,755,467 (15,094,265) 230,297,613 Equipment 40,078,664 1,170,842 (15,679) 41,233,827 Intangible right‐to‐use lease asset ‐ 60,016 ‐ 60,016 Total other capital assets at historical cost 265,715,075 20,986,325 (15,109,944) 271,591,456 Less accumulated depreciation for Buildings and improvements (52,010,244) (5,871,627) 13,534,181 (44,347,690) Equipment (20,204,312) (981,565) 15,679 (21,170,198) Less accumulated amortization for intangible right‐to‐use lease asset ‐ (6,426) ‐ (6,426) Total accumulated depreciation and amortization (72,214,556) (6,859,618) 13,549,860 (65,524,314) Other capital assets, net 193,500,519 14,126,707 (1,560,084) 206,067,142 Total capital assets, net 210,240,709$ 17,017,249$ (3,241,263)$ 224,016,695$

LESSEE – (Example)Principal and Interest Requirements to Maturity

At December 31, 2018, the principal and interest requirements to maturity are all follows:

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Fiscal Year Ended

December 31Principal Payments

Interest Payments Total

2019 10,656 1,344 12,000 2020 10,982 1,018 12,000 2021 11,316 684 12,000 2022 11,660 340 12,000 2023 4,972 28 5,000

49,586$ 3,414$ 53,000$

LESSORAccounting and Financial Reporting

49M32

M32 I suggest asking a couple more questions at this point to break things up.MLevine, 12/28/2018

LESSORRecognition and Measurement

At commencement of lease term Economic resources measurement focus (full accrual)Recognize a lease receivable and a deferred inflow of resources for present value of future lease payments to be receivedDR Lease receivable

CR Deferred inflow of resources

Current financial resources measurement focus (modified accrual)Governmental funds – Recognize deferred inflow of resources as revenue when available

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LESSORRecognition and Measurement (cont.)

Economic resources measurement focus:

Continue to report capital asset underlying the lease Continue to depreciate the asset during

lease term, unless the asset has an indefinite life or contract requires lessee to return asset in its original or enhanced condition

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Discount Rate - Lessor

Interest rate lessor charges the lessee • Interest rate may be implicit in the agreement

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Sum of the present value of lease payments + present value of any unguaranteed residual value

Sum of the fair value of underlying asset + any initial direct costs incurred by lessor (registration, legal, transportation, etc.)

Rate implicit in the lease agreement

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Lease Receivable

Fixed lease payments, less any incentives given

Certain variable payments

Residual value guarantees

LESSORInitial Measurement

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Deferred Inflow of Resources

Lease receivable

PLUS:Any prepayments received before

start of lease term that relate to future

periods

LESS:Any lease

incentives given before start of lease term

LESSORInitial Measurement

Example #1 – Government is Lessor55

Assumptions: Government (lessor) enters into a five-year contract to lease its

capital equipment (60 months) on April 1. Monthly payments of $1,000 are due on the first of every month.

Total monthly payments = $60,000. First payment due on April 1. Lessee has the option to purchase equipment for $2,000 at end of

lease term, that it is reasonably certain they will exercise. Payment must be made 30 days before end of lease term.

Lessor continues to depreciate the equipment with a historical cost of $60,000 and an estimated useful life of 8 years.

Annual interest rate charged on lease is 3%. Government’s fiscal year end is December 31.

Step 1 – Calculate the Lease Receivable

Calculate in same manner as the lessee calculates the lease liability = present value of future payments expected to be received over lease term (present value of monthly payments + present value of $2,000 purchase payment at end) Present value of monthly payments = $55,791

56

Rate = Interest rate per periodNper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made at beginning of period

Step 1 – Calculate the Lease Receivable (cont.)

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• Present value of $2,000 purchase payment at end = $1,725

Present value of lease receivable to recognize is $55,791 + $1,725 = $57,516

Rate = Interest rate per periodNper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made in last month of

lease)

Step 2 - Calculate Amortization of the Discount on Lease Receivable

58

amortization of lease paymentsAnnual interest rate 3.00%monthly rate 0.0025periods 60 Payment per year 12 Amount 55,791$ Payment 1,000$ =PMT(.0025,60,‐55791,0,1)

Payment Number Payment Interest Principal Balance57,516$

1 1,000$ ‐$ 1,000$ 56,516 2 1,000 141 859 55,657 3 1,000 139 861 54,796 4 1,000 137 863 53,933 5 1,000 135 865 53,068 6 1,000 133 867 52,201 7 1,000 131 869 51,332 8 1,000 128 872 50,460 9 1,000 126 874 49,586

The $1,000 monthly payment receivable is based on the present value of $60,000 in payments received over the 60 months of the lease. Since the lessor government will also receive the $2,000 purchase option on the 60th month, the total lease receivable to amortize at inception is $57,516.

59 1,000 10 990 2,993 60 3,000 7 2,993 ‐

The final $3,000 payment receivedrepresents the $1,000 payment received for the 60th month, plus the $2,000 purchase option received at the end of the lease term.

$56,516 x .0025

Payment ‐ Interest

Step 3 - Calculation of Deferred Inflow of Resources

Lease receivable - $57,516 Plus, any prepayments received before start of lease -

$0 Less, any incentives given to lessee before start of lease

- $0

Total deferred inflow of resources = $57,516

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Step 4 – Calculate Amortization of Deferred Inflow of Resources

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Amortize deferred inflow of resources in rational and systematic manner over the lease term.

Amortization of lease deferred inflow of resourcesDeferred inflow value 57,516$ Lease term (months) 60 Monthly amortization 959$ Annual amortization 11,508$

Month Number Amortization Balance57,516$

1 959$ 56,557 2 959 55,598 3 959 54,639 4 959 53,680 5 959 52,721 6 959 51,762 7 959 50,803 8 959 49,844 9 959 48,885 10 959 47,926

Year 1 amortization expense = $8,631($959 x 9 months)

Journal Entry at Inception of Lease

Current financial resources measurement focus:General fund – April 1

DR Lease receivable $57,516CR Deferred inflow of resources $57,516

To record receivable and deferred inflow of resources from the lease of equipment

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Journal Entry for Monthly Lease Payments Received and Amortization

Current financial resources measurement focus:General fund – Year end (9 months for initial fiscal year)

DR Cash $9,000CR Lease receivable $7,930CR Interest income $1,070

To record receipt of first 9 months of lease payments

DR Deferred inflow of resources $8,631CR Lease revenue $8,631

To record lease income

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Journal Entry for Depreciation of Equipment

Economic resources measurement focus – Year-end

DR Depreciation expense $7,500CR Accumulated depreciation - buildings $7,500To record annual depreciation on underlying asset

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LESSOR—Disclosures

Lease activities may be grouped for disclosure purposes1. A general description of leasing arrangements

Basis, terms, and conditions on which any variable lease payments not included in the lease receivable are determined

2. The total amount of inflows recognized in the reporting period from leases, if not displayed on the face of the financial statements

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LESSOR—Disclosures (cont.)

3. Total amount of inflows recognized in reporting period for variable and other payments not included in measurement of lease receivable

4. If lease payments secure the lessor’s debt, disclose terms, or options by lessee to terminate the lease or abate payments

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LESSOR—Disclosures (cont.)

5. If lessor’s principal ongoing operations consist of leasing assets to other entities, should disclose:• Schedule of future payments included in lease

receivable• Separate principal from interest• Disclose for five subsequent fiscal years separately,

thereafter, in five-year increments

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LESSOR – (Example)Note Disclosure

The government entered into a contract to lease its capital equipment for a period of five years beginning on April 1, 2018. Monthly payments of $1,000 will be received, with the first payment received on April 1, 2018. The lessee has the option to purchase the equipment for $2,000 at the end of the lease term, which it is reasonable certain they will exercise. The annual interest rate charged on the lease is 3%.

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Variations on Lease Contracts

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Contracts with Multiple Components

Report lease and nonlease components as separate contracts Leases with multiple underlying assets

• Account for as separate contracts• Allocate contract price to the different assets if:

oLease terms are different for the underlying assets, ORoUnderlying assets are in differing major asset classes for

disclosure

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Contracts with Multiple Components (cont.)

Allocate based on contract prices for individual components• Based on contract terms, if reasonable If there are no stated prices for individual

components, or prices appear unreasonable• Use best estimate based on professional judgment If not practicable to determine best estimate,

account for components as single lease unit

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Contract Combinations

Contracts entered into at or near the same time with the same counterparty• Consider part of the same lease contract if either

of the following criteria is met:oContracts are negotiated as a package with a single

objectiveoAmount of consideration to be paid in one contract

depends on the performance or price of the other contract

Combined contracts subject to guidance for contracts with multiple components

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Lease Modifications and Terminations

Amendments made while contract is in effect that change the provisions of the contract Modification

• Amendment considered to be a modification unless lessee’s right to use the underlying asset decreases

Termination • Lessee’s right to use the underlying asset is

decreased• May be partial or full termination

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Lease Modifications

Lessee and lessor should report as new lease (separate from the most recent lease contract) if both are present:• New underlying assets are added for lessee• Not unreasonable priced Otherwise, remeasure existing lease

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Lease Modification Example Lessee and lessor enter into 10-year lease for 10,000

square ft. of space in a building. At the beginning of year 6, they decide to modify the existing agreement to provide an additional 5,000 square ft. of space for the remaining lease term. • New lease agreement - If consideration for additional space

commensurate with the market price for similar arrangements• Modification - If consideration is below market price for similar

leases, then report as a modification of existing lease agreement and remeasure

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Lease Modifications75

If increase in payments can’t be tied to increase in assets, remeasure and adjust.

Update discount rate if one or both occur:• Change in lease term• Change in likelihood of exercising purchase option

Lessee Lessor+/‐ Intangible right‐to‐use asset +/‐ Lease receivable+/‐ Lease liability +/‐ Deferred inflow of resources

Journal entries needed:

Lease Terminations

Account for partial or full termination (other than a purchase) when lessee’s right to use the underlying asset is decreased or the number of underlying assets is reduced.


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Lessee LessorReduce/remove Intangible right‐to‐use asset Reduce/remove Lease receivableReduce/remove Lease liability Reduce/remove Deferred inflow of resourcesDifference Gain or loss Difference Gain or loss

Lease Terminations

If underlying asset is purchased by lessee:


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Lessee LessorRemove Intangible right‐to‐use asset Remove/reduce Lease receivableRemove/adjust Lease liability Remove/reduce Deferred inflow of resources

Record Purchased capital asset in appropriate asset class

RemoveCarrying value of purchased asset (historical cost ‐ accumulated depreciation)

M40

M40 From lessor's perspective, it's the sold asset, not the purchased asset.MLevine, 12/28/2018

Subleases

Treat initial lease and sublease as separate transactions Original lessor

• Continue to apply lease guidance for lessor Original lessee

• Account for original lease and sublease separately, as the lessee and lessor respectively

• The two separate transactions should not be offset against one another

• Disclose sublease in disclosure of the general description of lease arrangements

New lessee• Apply general lessee guidance

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Sale-Leaseback Transactions

Sale of underlying asset by the owner and a lease of the property back to the seller (original owner)

Must qualify as sale to be eligible• If does not qualify as sale, transaction is a borrowing

Treat sale and lease transactions separately• However, any gain or loss on sale portion should be deferred

and recognized over term of leaseback If terms are significantly off-market, report difference

based on substance of transaction Disclose terms and conditions of sale-leaseback in

notes to financial statements

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Lease-Leaseback Transactions

Asset leased by one party (first party) to another party and then leased back to the first party

Account for as a net transaction because each part of transaction is with the same counterparty (right of offset exists)

Both parties should disclose gross amounts of lease and leaseback in notes to financial statements

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Intra-Entity Leases

Leases with blended component units• If lessor is blended component unit – Debts and assets of lessor

reported as if they were debts and assets of primary government

Leases between blended component units• Eliminations for internal leasing activity take place before financial

statements are aggregated

Leases with/between discretely presented component units• Treat like normal leases, however, present receivables and

payables separately

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Leases between Related Parties

Classification and accounting the same as for similar leases between unrelated parties• Exception: When substance is different from legal

form, recognize substance of the transactionoExample: A lease contract is structured to meet the terms of

short-term lease, but mutual understanding by parties that the lease will be extended for several years – Account for as a long-term lease

Lessee and Lessor - Disclose nature and extent of leasing transactions with related parties

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Start Planning Now! Effective for periods beginning after December 15,

2019

GFOA Advisory, Accounting for Leases• http://gfoa.org/accounting-leases

GASB Implementation Guide for Leases• Expected issuance of final guide in June 2019

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accounting for leases under the new standard · 2020. 4. 28. · accounting for leases under the...

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