Introduction to GASB 87
The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, to improve financial reporting for government entities. GASB 87 provides guidance on lease accounting, including the identification of lease components and the recognition of lease assets and liabilities.
Under GASB 87, government entities are required to recognize lease assets and liabilities on their balance sheets, which provides a more comprehensive picture of their financial position. The standard also includes exclusions that are essential for government entities to understand and apply correctly.
Exclusions Under GASB 87
GASB 87 excludes certain types of agreements from its scope, including leases of intangible assets, such as software licenses, and leases of biological assets, such as livestock. Additionally, the standard excludes short-term leases, which are leases with a term of 12 months or less.
Other exclusions under GASB 87 include leases of assets that are not used in the government entity's operations, such as investments in real estate or other assets. These exclusions are crucial for government entities to identify and apply correctly to ensure accurate financial reporting.
Lease Accounting Under GASB 87
Under GASB 87, government entities are required to recognize lease assets and liabilities on their balance sheets. The lease asset represents the right to use the underlying asset, while the lease liability represents the obligation to make lease payments.
Government entities must also recognize lease revenue and expense on their income statements, which provides a more comprehensive picture of their financial performance. The standard includes guidance on the measurement and recognition of lease assets and liabilities, as well as the presentation and disclosure requirements.
Impact of GASB 87 on Government Entities
GASB 87 has a significant impact on government entities, as it requires them to recognize lease assets and liabilities on their balance sheets. This change in accounting treatment can affect government entities' financial ratios and credit ratings, as well as their ability to issue debt.
Government entities must also ensure that they have the necessary systems and processes in place to comply with the standard, including the ability to track and record lease agreements and recognize lease revenue and expense. This may require significant resources and investment in new systems and training.
Conclusion
In conclusion, GASB 87 provides guidance on lease accounting for government entities, including the identification of lease components and the recognition of lease assets and liabilities. The standard includes exclusions that are essential for government entities to understand and apply correctly.
Government entities must carefully consider the exclusions under GASB 87 and ensure that they are in compliance with the standard. This requires a thorough understanding of the standard and its requirements, as well as the ability to apply the guidance correctly in practice.
Frequently Asked Questions
What is the purpose of GASB 87?
The purpose of GASB 87 is to improve financial reporting for government entities by providing guidance on lease accounting.
What types of agreements are excluded from GASB 87?
GASB 87 excludes leases of intangible assets, biological assets, and short-term leases, among others.
How do government entities recognize lease assets and liabilities under GASB 87?
Government entities recognize lease assets and liabilities on their balance sheets, with the lease asset representing the right to use the underlying asset and the lease liability representing the obligation to make lease payments.
What is the impact of GASB 87 on government entities' financial ratios and credit ratings?
GASB 87 can affect government entities' financial ratios and credit ratings, as the recognition of lease assets and liabilities can change their financial position and performance.
What resources are required for government entities to comply with GASB 87?
Government entities require significant resources, including new systems and training, to comply with GASB 87 and ensure accurate financial reporting.
Why is it essential for government entities to understand the exclusions under GASB 87?
Understanding the exclusions under GASB 87 is essential for government entities to ensure accurate financial reporting and compliance with the standard.