What exactly is a lease?
August 9, 2021
By: William D. Oyster, CPA
Member of the Firm
I think before GASB 87, if we were asked if we knew what a lease was, we would answer for certain, “yes!” However, like with most accounting standards, the Government Accounting Standards Board (GASB) takes a definition that we all thought we had down pat and takes a sharp left turn. We now have to step back and ask ourselves: “what exactly is a lease?”
By GASB’s new definition, “A lease is a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) specified in the contract for a period of time in an exchange or exchange-like transaction.” In addition, control is manifested by “(1) The right to obtain the present service capacity from use of the underlying asset as specified in the contract and (2) The right to determine the nature and manner of use of the underlying asset as specified in the contract.”
There is a lot to unpack from GASB’s new definition of a lease. First, there are certain exclusions from GASB 87, including a significant item to most governments, software. GASB has given governmental entities a year reprieve from implementing similar accounting for software, when GASB 96 Subscription-Based Information Technology Arrangements will be effective (for fiscal years beginning after June 15, 2022). Service concessions are also excluded and will continue to follow GASB 60. Other exclusions are also detailed within the standard.
Next, there is a lot of information through the standard and implementation guidance on what meets the concept of conveying control. Only having partial rights or service capacity will most likely disqualify the contract from being a lease. However, you do have to be careful in applying this concept. Having exclusive access to a building three days a week would qualify as a lease. Although, not having exclusive use of an athletic field during a specified period would disqualify a contract from being a lease.
A good first step in determining your organization’s leases is listing all the regular payments made for using assets. From that list, you can start eliminating contracts that are clearly not leases by GASB’s definition. However, you do need to be careful; many contracts that would not have been considered a lease in the past will now qualify. For example, it is possible that contracts for transportation of school students would qualify if the contract conveys control of the school buses used in the transportation for a period of time in an exchange transaction. It is important as you are going through your list of potential leases that you review them with your accountant or auditor. If you are unable to come to a consensus on what qualifies as a lease, an inquiry can be made to the GASB.
It is important that you start your evaluation immanently, as GASB 87 is effective for fiscal years beginning after June 15, 2021. If you have questions or need assistance in implementing GASB 87, please contact one of the SEK governmental specialists.