GASB 87 Government Leases: Accounting for State and Local Government Leases
Complete guide to GASB 87 lease accounting for state and local governments on the CPA FAR exam. Covers lessee and lessor accounting, single-model approach, and journal entries.
GASB 87: Leases for State and Local Governments
GASB Statement No. 87 fundamentally changed lease accounting for state and local governments, effective for fiscal years beginning after June 15, 2021. Unlike ASC 842, which maintains a dual classification model for lessees (finance and operating), GASB 87 uses a single model for all leases. This simplification is a key distinction tested on the CPA FAR exam's governmental accounting questions.
Definition and Scope
Under GASB 87, a lease is defined 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. The standard excludes leases of intangible assets (covered by GASB 96), biological assets, inventory, and assets financed with conduit debt. Short-term leases (those with a maximum possible term of 12 months or less, including any options to extend) are also excluded from the recognition requirements.
Lessee Accounting
At commencement, a government lessee recognizes a lease liability and an intangible right-to-use lease asset. Note the terminology difference from ASC 842: GASB 87 calls it a right-to-use lease asset (not a right-of-use asset), and it is classified as an intangible asset rather than a tangible asset.
Lease Liability Measurement
The lease liability is measured at the present value of payments expected to be made during the lease term. Payments include fixed payments, variable payments based on an index or rate, fixed in-substance payments, payments for penalties the lessee must pay if reasonably certain to terminate early, residual value guarantees, and the purchase option price if reasonably certain to exercise. The discount rate is the rate the lessor charges the lessee (if known), or the lessee's estimated incremental borrowing rate.
Right-to-Use Lease Asset Measurement
The lease asset equals the initial lease liability plus any payments made to the lessor at or before commencement, minus any lease incentives received at or before commencement, plus any initial direct costs necessary to place the asset in service.
Subsequent Measurement
The lease liability is reduced by principal payments and increased by interest accrued. The lease asset is amortized on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset, unless the lease transfers ownership or contains a purchase option reasonably certain to be exercised (in which case the asset is amortized over the useful life). Interest expense on the lease liability and amortization expense on the lease asset are reported separately.
Lessor Accounting
At commencement, a government lessor recognizes a lease receivable and a deferred inflow of resources. The underlying asset is not derecognized; it remains on the lessor's books and continues to be depreciated.
Lease Receivable Measurement
The lease receivable is measured at the present value of lease payments expected to be received during the lease term. The discount rate is the rate the lessor charges the lessee, which may be the rate implicit in the lease or another rate specified in the lease agreement.
Deferred Inflow of Resources
The deferred inflow of resources equals the lease receivable plus any payments received at or before commencement that relate to future periods. The deferred inflow is recognized as revenue on a straight-line basis over the lease term. This differs significantly from FASB lessor accounting, where a sales-type or direct financing lease results in derecognition of the asset and potential gain recognition.
Key Differences from ASC 842
- GASB 87 uses a single model for all leases; ASC 842 classifies leases as finance or operating for lessees and as sales-type, direct financing, or operating for lessors.
- GASB 87 lessors recognize a deferred inflow rather than a net investment in the lease.
- GASB 87 classifies the lessee's right-to-use asset as intangible; ASC 842 presents the ROU asset separately or with property, plant, and equipment.
- GASB 87 lessors do not derecognize the underlying asset.
Short-Term Lease Exception
A short-term lease has a maximum possible term of 12 months or less, including any options to extend regardless of their probability of exercise. If any extension option could push the total term beyond 12 months, the lease is not short-term. Short-term leases are recognized as outflows (expenses) or inflows (revenues) based on the payment provisions.
Exam Preparation Tips
- Understand the single-model approach and how it differs from FASB's dual-classification system.
- Know the lessee entry: debit lease asset, credit lease liability. Know the lessor entry: debit lease receivable, credit deferred inflow.
- Remember that GASB 87 lessors keep the underlying asset on their books, unlike FASB sales-type or direct financing lessors.
- Pay attention to the short-term lease definition -- it includes any options to extend regardless of probability.
- Practice calculating amortization schedules for the lease liability and the straight-line amortization of the lease asset.
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