The Governmental Accounting Standards Board set the effective date for the GASB 87 leases standard at June 15, 2021, after pushing it back by 18 months during the pandemic, but many state and local governments are apparently behind on implementing it.
The standard in some ways parallels the ASC 842 leases standard for public and private companies and nonprofits from the Financial Accounting Standards Board and the IFRS 16 leases standard from the International Accounting Standards Board in that it would put leases on the balance sheet for the first time for many entities. For companies in the private sector, many of them also procrastinated on implementing the leasing standard, despite extensions from both FASB and the IASB during the pandemic. Now state and local governments will be facing similar issues as they try to account for this past fiscal year.
“GASB 87 is very similar to ASC 842 and IFRS 16 in a variety of ways,” said Joe Fitzgerald, senior vice president of lease market strategy at Visual Lease, a lease accounting and management software company. “The big difference, though, is for public sector entities there are also lessors, so a lessor component is much more significant than ASC 842. They’ve got to get a lot of lessor arrangements on their balance sheets as well. It’s an added challenge. They’ve got the lessee side as we’ve seen with ASC 842, and now they’ve got a pretty large lift on the lessor side.”
He expects to see thousands of state and local governments scrambling this year to comply with the accounting change. “There are roughly 90,000 public sector entities in the U.S.,” said Fitzgerald. “A lot of them have a non-calendar fiscal year end. Specifically, there’s a lot of June 30th’s, so when you think about that, and the standard went effective for reporting periods beginning after June 15 of 2021, that tells you fiscal 2022 and June fiscal 2022 should be a lot of activity for folks adopting.”
However, the change in lease accounting standards for state and local governments hasn’t received anywhere near as much attention as the one for public and private companies did a few years ago. Many government accountants may not even be aware of it or assume the deadline is still far off.
“We are not seeing a wave yet that we thought we would be seeing in the early part of this year,” said Fitzgerald. “If you think about ASC 842 customers, a lot of them are 12/31’s. So what they’re doing in January, February and into March is closing their books. They’re getting their annual reports out to the accountants. They’ve got their heads down and they’re not thinking about the next thing. However, if GASB customers are June 30, you would think that we would have seen a lot more activity.”
While his company has been fielding some inquiries, some governments may be waiting until later this year to adopt the new GASB 87 standard.
“There will be different waves,” said Fitzgerald. “It’s not like they’re all June 30. There are a lot of 12/31’s as well.”
Government accountants may still be learning about the new leases standard or preparing to put out a request for proposals from different software vendors.
“We hear about a variety of reasons,” said Fitgerald. “Public sector entities still don’t have their arms around 87 as much as we would have thought in terms of the nuts and bolts of what it means in educating themselves. A lot of them in the public sector have to go through a more formal RFP process than we see in the private sector, so that tends to slow the process down for these entities. It’s not like they can avoid adopting it, though. It’s not like they can say, ‘We elected not to adopt this lease accounting standard. We’re going to wait until the future.’ They’re going to have to do something. Now, as we slide closer to June 30, we may see a real rush in the last couple of months, or maybe even into what we traditionally would see as the reporting period, meaning July through September or October.”
Another issue may simply be awareness that a new leasing standard is out there, although that’s likely to change this year. “We don’t feel there’s as much awareness as we would have thought,” said Fitzgerald. “Like any industry, a lot of associations have said they socialize things lIke GASB 87 workshops, seminars and conferences. There are a number of conferences coming up that government accountants would attend where GASB 87 is on the agenda. One of the challenges with something like this is the fact that whenever there’s any deferral, what happens is people put their pencils down and stop thinking about it, and then they have to pick their pencils back up. There’s a bit of that, but we don’t feel the understanding is quite as great as we see in the private sector.”
The new standard includes a number of requirements, especially for lessors. “GASB entities have to track activities by funds so they’ve got other accounting and reporting requirements that they have from a disclosure perspective,” said Fitzgerald. “The concept of fund accounting will come into this.”
Another upcoming standard, GASB 96, is also going to need to be taken into account by government accountants. “GASB 87 is around tangible assets like ASC 842, things like real estate and equipment,” said Fitzgerald. “A year later, there’s also something called GASB 96, which is around what we’ll call intangible assets, which is these subscription-based information technologies. Think about SaaS agreements. That would fall under that. So they’re also going to look a year later for all of those to be put on the balance sheet.”
Some RFPs are already asking software vendors for both GASB 87 and 96 compliance, but not many, according to Fitzgerald. “It’s a small percentage, but we do see some that are aware that’s coming as well,” he said. “But that’s coming right on the heels. You could argue that if you’re doing 87, you really should have done 96 at the same time, or try to do 96 because you could even pull that forward. But they tend to be a little slow. The other thing we tend to see is that some of the public sector entities are looking to their advisors and service providers to build templates. We may see a high percentage try to use Excel or some kind of accountant-developed template.”
State and local governments run risks if they don’t make the adjustment to the new GASB standards.
“The highest-level risk is if you don’t comply with generally accepted accounting principles as set by the governing body, you could run the risk of getting a qualified audit opinion, and that’s not a good thing for anybody,” said Fitzgerald. “If you slap something together, or if you use an Excel spreadsheet that doesn’t have a good process around it, you could have a material weakness in your internal controls. Not a great thing either. If they don’t comply correctly, it could affect their credit rating, especially if they put a big liability up on their balance sheet. It could affect some of their debt covenants and arrangements. We talk about that a lot with the private entities as well as the public entities about how they should be talking with any of their financing sources and looking at their debt arrangements. That’s a very real thing. This is a new accounting standard that will have some impact on their balance sheet, so that’s a risk.”
Another risk is not doing a full assessment of all their leases, including so-called embedded leases that are deep inside other types of contracts.
“The typical risk is if you don’t do a good job of getting a complete population of your leases,” said Fitzgerald. “You have to have a strategy around data extraction and validation. It’s the garbage in and garbage out concept, if you don’t make the right decision about whether to leverage technology or not. Then having the right source is the other thing. Almost everybody underestimates this project, whether you’re on the public sector side or private company side, and as a result they’re always under-resourced. We see the same thing in the public sector. They all have day jobs, and this is kind of a secondary item, so resources are an issue. They’re the same themes as ASC 842 in a lot of ways.”
The main message is not to wait much longer to implement the new standard. “If you wait too long and there is a rush, there’s going to be a capacity issue in the market,” said Fitzgerald. “That is always a concern. If you wait until June 30 to get done something that needs to be on your books as of June 30, that’s going to be a challenge. All of a sudden, folks will be coming out of the woodwork at different points. It is a concern that folks procrastinate.”
