Previously, governmental entities reported their leases similarly to how private entities reported leases under ASC 840. While finance leases would be capitalized on the balance sheet, operating leases would be reported in the footnotes. However, the Governmental Accounting Standards Board’s Statement No. 87 (or GASB 87) requires that all operating leases now be accounted for as finance leases. As a result, leases previously classified as operating leases will not only be capitalized on the balance sheet, but also be reported differently on the income and cash flow statements. The reporting requirements will be in effect for government entities beginning Dec. 15 for all reporting periods subsequent to that date.
The standard generally mirrors leasing standards issued by the Financial Accounting Standards Board and the International Accounting Standards Board, although there are specific differences in accounting treatment. Government entities also face other challenges specific to the nature of their operations, challenges that many may not have anticipated, and which are related to the very nature of their organizations. The following are some key areas of consideration for organizations moving forward:
Widely distributed assets
Many of these entities service widely distributed populations through many different locations. State agencies, and even large municipal interests, may operate out of dozens or even hundreds of locations, each with leased properties or equipment. As per the standard, accounting must be reported at the asset level. This necessarily requires that any changes to the asset, such as impairment or loss, requires a process to regularly reach out to each and every asset user to get these dispositions recorded. Scaling this process can pose serious problems without automation.
Widely distributed leasing process
In addition to the disposition of the assets, the lease itself will undergo midterm and end-of-term changes that can materially affect reporting. Often the individual responsible for the lease is different from those responsible for the asset. Again, regular communication with respect to the status of the lease and its various options such as renewals, returns or buyouts must be recorded in order to satisfy reporting requirements. In a situation where gathering this data from so many individuals exists, accomplishing this without automation imposes a significant manual process fraught with error, not to mention cost.
Added scrutiny
While all public and private entities must be concerned with their financial profile for investors, creditors, and the like, government entities must also comport with the inspection of other entities. For those receiving federal funds, correct reporting is essential to avert potential issues. And intra-state governance may no doubt also play a role in evaluating the financial profile revealed by the standards.
The role of automation
All of this added risk calls for added caution and prevention, a lesson that can be taken from private companies that had to comply with FASB’s leases standard, ASC 842, and the IASB’s leases standard, IFRS 16. What many have reported is that the inherent complexity of the standards, especially when compounded by highly distributed leasing operations, required them to implement either substantial manual processes to overcome these gaps or to implement technological solutions. Implementing a greater level of automation has been shown to be critical to those organizations who face the challenges imposed by the new lease accounting standards and especially those inherent in distributed organizations. It’s important for organizations subject to GASB 87 to evaluate their strategy for automating this increase in processes so it doesn’t negatively impact their workload or costs.
