5 Essential Strategies For Gasb 87 Compliance

🎯 Introduction to GASB 87 Compliance

Welcome to a comprehensive guide on how to navigate and implement the requirements of GASB 87 - the Governmental Accounting Standards Board Statement No. 87, which sets new standards for lease accounting. This standard, effective for periods beginning after June 15, 2021, introduces significant changes to how leases are recognized, measured, and disclosed. If your organization falls under the jurisdiction of public sector accounting, understanding and complying with these regulations is not just a necessity but also a strategic advantage. Here, we delve into five essential strategies that can help in ensuring compliance with GASB 87.

<div style="text-align: center;"><img src="https://tse1.mm.bing.net/th?q=Accounting for Leases" alt="Accounting for Leases"></div>

🎯 1. Understand the Scope and Requirements of GASB 87

What is GASB 87?
GASB 87 affects all leases with a term exceeding 12 months, except for certain exceptions like short-term leases, leases of biological assets (e.g., livestock), inventory, and leases of assets being held as investments. Here's what you need to focus on:

• Definition of a Lease: GASB 87 defines a lease as a contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

• Leases Not Covered: Short-term leases, those that, at the commencement of the lease term, have a maximum possible term of 12 months or less including options to extend. Also, leases for biological assets, inventory, or held for investment purposes are excluded.

• Basic Requirements: Entities need to recognize a lease liability and a right-of-use asset for leases with terms exceeding one year. This is a shift from merely recording operating leases off-balance sheet to now requiring a liability and an asset to be recorded.

Implementing the Requirements:

• Review and classify all lease agreements to determine if they fall under GASB 87.
• Determine the terms of the lease which would include all options and potential extensions unless it's reasonably certain they will not be exercised.

🎯 2. Implement Robust Lease Tracking Software

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Why Software is Crucial:
Compliance with GASB 87 demands precise tracking of all lease details from inception to termination. Manual management can lead to errors, missed deadlines, and non-compliance issues.

• Features to Look For:
  • Ability to manage all lease types under GASB 87.
  • Robust tracking of lease terms, payments, and schedules.
  • Automated alerts for lease renewals, terminations, and accounting adjustments.
  • Accurate calculations of the present value of lease liabilities and amortization schedules.

Implementation Steps:

• Assess Current Systems: Understand what you currently use for lease tracking or if there's nothing in place, recognize this need.
• Select a Solution: Look for software tailored for GASB 87 compliance. Consider features, user reviews, integration capabilities, and cost.
• Training: Provide thorough training to your accounting team to ensure they understand how to use the software effectively.

<p class="pro-note">💡 Note: Software selection should be based on scalability, user-friendliness, and support for GASB 87 specific requirements.</p>

🎯 3. Conduct Comprehensive Lease Inventory

<div style="text-align: center;"><img src="https://tse1.mm.bing.net/th?q=Lease Inventory" alt="Lease Inventory"></div>

Why Inventory Matters: An exhaustive inventory is the foundation of compliance. It involves listing all leases your entity is party to, including less obvious ones like software or equipment leases.

Steps in Conducting Inventory:

• Gather Data: Collect all lease agreements, real estate, equipment, and software leases included.
• Classify Leases: Identify which leases fall under GASB 87. This includes terms over 12 months, excluding short-term leases.
• Document Details: Record terms, lease commencement date, payment schedule, options to extend, termination rights, and renewal options.

<p class="pro-note">📋 Note: An incomplete lease inventory can lead to non-compliance issues and financial misstatements.</p>

🎯 4. Accurate Measurement and Disclosure

<div style="text-align: center;"><img src="https://tse1.mm.bing.net/th?q=Lease Measurement" alt="Lease Measurement"></div>

Measurement Requirements: Under GASB 87, lessees must measure lease liabilities and recognize right-of-use assets at the lease commencement date. The key points are:

• Lease Liability: The present value of lease payments discounted at the rate implicit in the lease, or if that cannot be determined, the lessee’s incremental borrowing rate.
• Right-of-Use Asset: Initially measured at the lease liability amount, plus any initial direct costs.

Steps for Measurement and Disclosure:

• Calculate Present Value: Determine the present value of future lease payments.
• Determine Initial Direct Costs: Include payments made at or before lease commencement and other direct costs.
• Amortization Schedule: Create an amortization schedule for both the lease liability and the right-of-use asset.

🎯 5. Continuous Monitoring and Reporting

<div style="text-align: center;"><img src="https://tse1.mm.bing.net/th?q=Lease Monitoring" alt="Lease Monitoring"></div>

Why Continuous Monitoring:
Lease terms can change, and so can the financial implications. Regular monitoring ensures your reporting remains accurate.

Ongoing Practices:

• Lease Modification: Monitor for changes in lease terms which might necessitate remeasurement.
• Periodic Assessments: Conduct periodic reviews to ensure all lease data is up-to-date.
• Reporting: Regularly report on the status of leases, ensuring that all necessary disclosures are made in the financial statements.

<p class="pro-note">🔍 Note: Keeping up with ongoing changes in lease agreements is crucial for maintaining accurate financial records.</p>

Final Thoughts:

GASB 87 compliance is not just about following rules; it's about adopting best practices in lease accounting to enhance transparency, reduce risk, and ensure the financial integrity of your organization. By understanding the scope, using the right tools, maintaining comprehensive records, performing accurate measurements, and ensuring continuous monitoring, your entity can navigate these new regulations with confidence. Remember, the journey to compliance starts with a clear understanding of the standard and its implications. Let this be your roadmap to not only meeting the requirements of GASB 87 but thriving under the new accounting standards.

<div class="faq-section"> <div class="faq-container"> <div class="faq-item"> <div class="faq-question"> <h3>What types of leases are covered by GASB 87?</h3> <span class="faq-toggle">+</span> </div> <div class="faq-answer"> <p>GASB 87 covers leases with a term exceeding 12 months, excluding short-term leases, biological assets, inventory, or assets held for investment purposes.</p> </div> </div> <div class="faq-item"> <div class="faq-question"> <h3>How does GASB 87 change the way leases are reported on the balance sheet?</h3> <span class="faq-toggle">+</span> </div> <div class="faq-answer"> <p>GASB 87 requires the recognition of a lease liability and a right-of-use asset for leases with terms longer than one year, effectively bringing these onto the balance sheet which was not always the case with operating leases.</p> </div> </div> <div class="faq-item"> <div class="faq-question"> <h3>What should be considered when selecting lease tracking software?</h3> <span class="faq-toggle">+</span> </div> <div class="faq-answer"> <p>Consider software that can handle all lease types, provides accurate calculations, offers robust tracking features, and ensures user-friendliness for effective compliance with GASB 87.</p> </div> </div> <div class="faq-item"> <div class="faq-question"> <h3>Is it necessary to remeasure leases under GASB 87 if terms change?</h3> <span class="faq-toggle">+</span> </div> <div class="faq-answer"> <p>Yes, changes in lease terms or payments require remeasurement to ensure compliance with GASB 87 standards.</p> </div> </div> <div class="faq-item"> <div class="faq-question"> <h3>What are the consequences of non-compliance with GASB 87?</h3> <span class="faq-toggle">+</span> </div> <div class="faq-answer"> <p>Non-compliance can lead to misstatements in financial reporting, potential legal ramifications, and loss of public trust. Proper compliance ensures accurate financial representation and transparency.</p> </div> </div> </div> </div>