GASB 87 Implementation Guide for Government Entities

The implementation of GASB Statement No. 87 represents one of the most significant changes to government lease accounting in decades. This comprehensive guide explores the key considerations, challenges, and best practices for successful implementation.

Understanding GASB 87: A Paradigm Shift

GASB 87 fundamentally changes how government entities account for leases by establishing a single model for lease accounting based on the principle that leases are financings of the right to use an underlying asset. Under this standard, lessees are required to recognize a lease liability and an intangible right-to-use lease asset for most leases.

The standard eliminates the previous classification of leases as either capital or operating, requiring all leases with terms exceeding 12 months to be reported on the statement of net position. This change significantly impacts financial statements and requires careful planning and execution.

Key Deadline

GASB 87 is effective for fiscal years beginning after June 15, 2021. Government entities should ensure full compliance and proper documentation of all lease arrangements.

Impact on Public Sector Asset Management

The implementation of GASB 87 has far-reaching implications for government asset management practices:

Enhanced Transparency: All lease obligations are now visible on the balance sheet, providing stakeholders with a clearer picture of government financial commitments.
Improved Decision-Making: Better visibility into total cost of ownership helps government entities make more informed lease-versus-buy decisions.
Comprehensive Asset Tracking: Organizations must maintain detailed records of all leased assets, including terms, payments, and renewal options.
Budget Planning: Recognition of lease liabilities affects debt ratios and may impact borrowing capacity and budget allocations.

Key Implementation Steps and Timeline

Successful GASB 87 implementation requires a structured approach with clear milestones:

Lease Inventory and Data Collection

Identify all lease agreements across departments, including real estate, equipment, vehicles, and technology. Gather complete lease documentation including terms, payment schedules, renewal options, and termination clauses. This phase typically requires 2-3 months for large government entities.

Policy Development and Review

Establish accounting policies for lease classification, measurement, and disclosure. Determine the discount rate methodology and document short-term lease thresholds. Review and update internal controls for lease management and approval processes.

System Configuration and Testing

Configure financial systems or implement lease accounting software to calculate lease liabilities and right-to-use assets. Test calculations for accuracy and ensure proper integration with general ledger systems. Validate reporting outputs against GASB 87 requirements.

Initial Measurement and Recognition

Calculate initial lease liabilities and right-to-use assets for all qualifying leases. Record opening balances and prepare transition adjustments. Document all assumptions and methodologies used in calculations for audit purposes.

Training and Change Management

Train finance staff, department heads, and procurement personnel on new lease accounting requirements. Establish ongoing processes for lease identification, approval, and monitoring. Communicate changes to stakeholders and auditors.

Common Implementation Challenges

Government entities frequently encounter several challenges during GASB 87 implementation:

Challenge 1: Decentralized Lease Management

Many government organizations have leases managed across multiple departments without centralized oversight. This makes it difficult to identify all lease agreements and gather complete documentation.

Solution: Implement a centralized lease repository and establish mandatory reporting requirements for all departments entering into lease agreements.

Challenge 2: Embedded Leases

Service contracts may contain embedded leases that are not immediately obvious, such as dedicated equipment or space within broader service agreements.

Solution: Conduct a comprehensive contract review with clear criteria for identifying embedded leases. Train procurement staff to flag potential lease components in service contracts.

Challenge 3: Discount Rate Determination

GASB 87 requires using the rate the lessor charges the lessee, or if not readily determinable, the government's estimated incremental borrowing rate. Many entities struggle with this calculation.

Solution: Develop a documented methodology for determining discount rates, considering the government's credit rating, lease term, and current market conditions. Consult with financial advisors if needed.

Challenge 4: System Limitations

Existing financial systems may not have built-in functionality to handle GASB 87 calculations and reporting requirements, necessitating manual processes or system upgrades.

Solution: Evaluate lease accounting software solutions or work with system vendors to implement necessary functionality. Consider cloud-based solutions for flexibility and scalability.

Best Practices for Compliance

Based on our experience helping government entities implement GASB 87, we recommend the following best practices:

Maintain Comprehensive Documentation

Keep detailed records of all lease agreements, amendments, and supporting calculations. Document policy decisions and methodologies for audit trail purposes.

Establish Ongoing Monitoring

Implement processes to identify new leases, modifications, and terminations. Conduct periodic reviews to ensure all leases are properly accounted for.

Cross-Functional Collaboration

Involve finance, procurement, legal, and department heads in the implementation process. Ensure clear communication channels and responsibilities.

Internal Controls

Strengthen internal controls around lease approval, data entry, and financial reporting. Implement segregation of duties and regular reconciliations.

Disclosure Requirements

GASB 87 requires extensive disclosures in the notes to financial statements, including:

General description of leasing arrangements
Total lease assets recognized, by major class of underlying asset
Principal and interest requirements to maturity for lease liabilities
Commitments under leases before commencement
Amount of inflows recognized from lease-related sources

How CPCON Can Help

CPCON has extensive experience helping government entities successfully implement GASB 87. Our comprehensive services include:

Lease Discovery and Inventory

We conduct comprehensive reviews to identify all lease agreements across your organization, including embedded leases in service contracts.

Lease Accounting Calculations

Our team performs initial and ongoing lease liability and right-to-use asset calculations in accordance with GASB 87 requirements.

Policy Development

We help develop comprehensive lease accounting policies tailored to your organization's specific needs and circumstances.

Training and Support

We provide training for your staff and ongoing support to ensure successful implementation and compliance.

Ready to Ensure GASB 87 Compliance?

Our team of experts is ready to help your government entity navigate GASB 87 implementation with confidence. Contact us today to discuss your specific needs and learn how we can support your compliance journey.

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GASB 87 Implementation: Key Considerations for Government Entities

Written By

Jarred Wakefield

Jimena Ibarra