What you need to know about GASB 87
GASB is an independent non-profit organization sponsored by the Financial Accounting Foundation to set local and state accounting rules. The main purpose is to establish truth in accounting, unlocking the off-balance sheet liabilities such as leases, employees’ pension, and retiree health care liabilities. Specifically, GASB Statement 87 targets the lease liabilities which were not reported in the balance sheet.
- All operating leases will now be classified as Finance Leases.
- Unlike ASC 842 and IFRS 16, lessors are required to record lease receivables and deferred inflow of resources.
- Requires new disclosures that were previously not required.
- More than 70% of the government organizations are just starting the process.
- With compliance now due June 15th, 2021, agencies can run the risk of falling behind.
Scope of the new GASB lease accounting standard
GASB 87 defines the scope of leased assets as non-financial assets, such as land, buildings, equipment, and vehicles. Certain non-financial asset-based lease agreements are out of scope, such as leases of intangible assets, biological assets, inventory, service concession arrangements, supply contracts, and assets financed with outstanding conduit debt.
At the commencement of the lease term, the lessee obtains the right to use the underlying asset by either gaining physical possession of the asset or attaining access to use the underlying asset. The lease asset is the right to use of the underlying asset rather than the underlying asset itself. The right to use of asset makes the underlying asset a resource to the lessee and provides the lessee with access to the underlying asset’s present service capacity. Therefore, at the commencement of the lease term, the prepayments should be reclassified as part of the initial measurement of the lease asset.
Contracts with Multiple Components
Initial direct costs are not included in the measurement of the lease liability. Installation costs generally are considered a non-lease component. Because payments are for non-lease costs and not for the right to use asset, the payments are not considered lease payments and should be accounted for as a separate liability. However, if the non-lease costs are ancillary charges necessary to place the lease asset into service, they should be included in the initial measurement of the lease asset.
The components of the contract should be separated if the accounting treatment for each component would be different.
Effective Date and Transition of Statement 87
GASB 87 states that leases should be measured using the facts and circumstances that existed at the beginning of the period of implementation. The government is not required to estimate what the lease asset would have been if it initially had been recognized and amortized in prior periods as a lease under the provisions of Statement 87. The lease liability should be measured using the remaining lease term and discount rate as of the beginning of the earliest period restated. The right-to-use asset should be measured based on the lease liability at that date and no restatement of beginning net position would be required because the lease asset and the lease liability would be the same.
Changes adopted to conform to the provisions of the Implementation Guide should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. If restatement for prior periods is not practicable, the cumulative effect, if any, of applying the Implementation Guide should be reported as a restatement of beginning net position for the earliest period restated. In the first period that the Implementation Guide is applied, the notes to financial statements should disclose the nature of the restatement and its effect. Also, the reason for not restating prior periods presented should be disclosed.
- Lease Definition
From the contract universe, identify those leases that are actual contracts which have underlying assets (intangibles and natural resources are exempted) and convey the right of use asset.
- Lease Term
Period during which lessee has a non-cancelable right to use the underlying asset, in addition to other provisions like renewals, terminations, and extensions.
- Lease Accounting
- Short Term Leases
Short term leases are leases which are less than 12 months. They are treated differently from long term in the sense that they do not create ROU asset and corresponding liability.
- Lease Modifications and Terminations
- Separation of Lease and Non-Lease Components
Only fixed minimum portion of the lease are used for PV calculations the variable non-lease components such as parking, CAM are treated normally expensed out.
- Sub Lease and Lease Back Transactions
- Effective Date and Transition
- Disclosure Reporting
Sierra Digital has developed custom disclosure reports, in addition to Weighted Average Term and Rate, which are still under development in SAP.
Why SAP – CLM?
- Natively integrates with other SAP modules like AP, AR, PM; reducing data transfer complexity and integrity of data between modules.
- SAP – CLM is a future-proof solution. For those having non-SAP lease management solutions, they cannot be sure if the non-SAP solutions can work with new asset accounting, new GL, or S/4 HANA. There are some projects that have be stalled with non-SAP solutions due to their ineffectiveness in complying to 4-4-5 calendar, multiple depreciation areas, multiple currency, and foreign currency valuations.
- Transition accounting has been made much simpler with additional dates start of consideration, valuation start date, first posting date,etc. This helps assure coverage of all forms of transition accounting (retrospective and prospective) with ease.
- Additional features like audit trail, security compliance, and system performance make SAP - CLM the most viable solution for SAP customers.
Why Sierra Digital?
- Implemented over 25 lease management projects around the globe.
- Sierra Digital’s proprietary accelerator, Canopy, can cut short your implementation time by over 50%, and data cut over time by 90%+.
- Over 15 customers have unleashed the power of Sierra Digital’s Mass Upload Tool, a feature non-existent in the SAP world, to cut short the mass loading of contracts by 90%. As an example, Sierra Digital implemented CLM for a customer which had 8,000+ contracts. Imagine the time required to load these contracts manually.
- Sierra Digital’s tools come with a Data Cleansing, Harmonization, and Validation Engine which has the power to validate over 40+ in-built rules. This assures the upload of accurate data in the system.
- Sierra Digital offers end-to-end lease management solutions,includinglease classification, identification, lease measurement, transition accounting, and disclosure reporting. These solutions exist independently from implementations involving SAP - CLM.
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