The implementation of GASB Statements 87 and 96 has brought significant changes to how government entities report leases and subscription-based information technology arrangements. A thorough understanding and meticulous application of these standards is essential to ensure ongoing compliance and transparency in financial reporting. While robust software solutions can streamline these processes, it's still important to have a fundamental grasp of the requirements for successful implementation
Understanding GASB 87
GASB 87 defines a lease as a contract that conveys control of the right to use another entity's nonfinancial asset for a period of time in an exchange or exchange-like transaction.
Efficient compliance with GASB 87
Maintaining compliance with GASB 87 requires ongoing effort. Fortunately, specialized lease accounting tools can significantly ease this burden. These tools automate key tasks like calculating lease liabilities and assets, keeping your organization compliant with the standard.
They also offer efficient management of lease terms, modifications and terminations. Such comprehensive solutions minimize human error and enhance the accuracy of your reporting, leading to greater confidence in your financial data.
Understanding GASB 96
GASB 96 mandates the capitalization of certain costs beyond subscription payments and requires detailed disclosures about SBITAs. It defines the subscription term as the period during which a government entity has rights to use the underlying assets.
Managing SBITAs under GASB 96
Accounting practices under GASB 96 mirror those for leases under GASB 87. When entering an SBITA, a government entity must recognize both the subscription asset and liability on its financial statements. The values are calculated based on the present value of future subscription payments, discounted by an appropriate rate. These assets should then be amortized over the subscription term, aligning with payment schedules and reducing the liability over time.
Practical examples and applications
Managing a fleet vehicle lease under GASB 87, as one example, involves detailed recognition of lease assets and liabilities, including adjustments for any contractual payment increases over the lease term.
In practical terms, adhering to GASB 87 and 96 is quite intricate. Beyond managing a fleet vehicle lease, let's consider a more detailed scenario to illustrate the complex aspects of lease accounting.
Example: Municipal building lease under GASB 87
Imagine a local government that enters into a lease for a building owned by a private entity. The lease term is five years, with an implicit rate known and determinable at 3.5%. Monthly payments start at $10,000, with a 2% annual escalation stated in the lease agreement. This lease also includes options to extend for two additional five-year terms, which the government is reasonably certain to exercise due to the location and significance of the building.
Under GASB 87, the government would recognize a lease liability and a corresponding lease asset at the present value of future payments, factoring in the certainty of the lease extension. Tools that can automate the calculation of this present value, considering the incremental increases and the extension options, provide precision and save considerable time. As the lease progresses, these tools can account for the amortization of the lease asset and the interest recorded on the remaining lease liability, reflecting the systematic reduction of the obligation over the term.
Example: Software platform SBITA under GASB 96
An example under GASB 96 could involve the same local government subscribing to a cloud-based software platform for city management. The agreement includes a three-year noncancelable term with an annual payment of $50,000 due at the start of each year. In addition, the contract requires an initial implementation fee of $15,000, which covers the configuration and installation costs.
For this SBITA, the government would record both the subscription liability at the present value of future payments and the subscription asset, which would also include the initial implementation fee as part of the subscription asset. Over the SBITA term, the government would then amortize this asset in a systematic manner throughout the subscription term. Automated tools specifically designed for these scenarios can manage the capitalization of upfront costs and subsequent expense recognition, ensuring all entries are accurate and audit-ready.
Addressing modifications and terminations
Consider a scenario where a lease is modified. For example, a government entity has a lease agreement for five years with a five-year renewal option it was not reasonably certain to extend at the commencement of the lease. The original term was for five years. In year four of the lease, the entity determines it is now reasonably certain the lease will be extended for the additional five years, so the lease liability and associated lease asset must be remeasured.
Likewise, if an SBITA for an enterprise resource planning system is terminated early with an associated termination fee, this would require reducing the carrying values of the subscription asset and liability to zero and may result in a gain or loss for the difference.
Navigating the details of GASB 87 and 96 involves a series of complex accounting determinations, where each lease or SBITA's unique terms can significantly impact the financial statements. In this intricate environment, leveraging advanced tools that provide automated calculations, amendment tracking, and modification handling becomes invaluable.
Integrating solutions
In navigating these standards, integrating specialized accounting tools can subtly enhance operational efficiency. The need for precision in applying these standards is well-documented, with resources on GASB 87 highlighting the importance of accurate lease accounting. As governmental entities work to adopt these standards, leveraging advanced software becomes an invaluable part of ensuring successful implementation.
As the landscape of governmental accounting continues to evolve, the adoption of GASB 87 and 96 presents both challenges and opportunities. With the right tools and a solid understanding of the standards, entities can achieve not only compliance but also improved financial management and reporting.
