Episode 1 “A Breakdown of GASB 87: What You Need To Know”

VLDI Podcast Episode 1 Transcript
Joe: 

Hi everyone, and welcome to the first official episode of the Visual Lease Data Institute Podcast. My name is Joe Fitzgerald, I’m the SVP of Lease Market Strategy here at Visual Lease, and I’m your host.

So, without further ado, allow me to introduce our guest, Michael Vanscoy. Michael is a Managing Director at the Solomon Edwards Group, with more than 25 years of experience in various aspects of technical accounting and financial reporting. His knowledge spans both FASB and IFRS, as well as GASB. Michael has extensive experience supporting his clients with accounting and reporting for public offerings, mergers and acquisitions, debt and equity transactions and complex consolidation topics.

He also brings deep, hands-on experience in all aspects of public reporting for SEC registrants, from registration statements to the preparation of periodic filings. I’ve invited Michael to join us here today to address two big questions that are top of mind for our customers, and that’s:

• What’s on the horizon for public sector entities with respect to the new GASB lease accounting standard, and…
• How can companies ease into their annual audit stress through the lease accounting process?

So, let’s jump right in. Hello, and welcome, Michael. Thanks for joining us.

Mike:

Thank you. Thanks for inviting me today.

Joe:

So, now that we’ve set the stage, what exactly is GASB 87? And what does it entail? I’d love to get your thoughts on what’s just around the corner for those impacted public sector organizations.

Mike: 

Right, so GASB 87 follows the same sort of projects that the FASB and IFRS have followed. Leases that used to be off the balance sheet – what we refer to as operating leases – are now going to be on the balance sheet. So, what’s on the horizon for all governmental entities is a lot of contracts they had previously reported through their income statement or through disclosures in the financial statements, are now going to be on their balance sheet in the form of assets and liabilities. Before, they didn’t have to record them.

So, now you’re going to see balance sheets become a bit more bloated with assets and liabilities. And there’s going to be a lot more rigor around that and some expanded disclosures that come with that. So, it really is a huge structural change in terms of how you report leases.

Joe:

And I’ve got to imagine the stakeholders are going to provide a lot more scrutiny around that as well, right?

Mike:

Yeah, and that’s what we’ve seen in the private sector. So, with FASB and IFRS, sort of as a precedent to this, what you’veseen is how everything is more transparent than it had been in the past, where financial statement users, whether they’re looking at private or public sector financial statements, often had to guess what level of assets were being leased by any organization.

I mean, sure, you could look at the disclosures, and you could see the minimum lease payments – you could see all those things – but it was hard to quantify, in your mind, without guessing and making a lot of assumptions about how much that represented in the form of a liability on a statement of net position, for instance, and a governmental entity.

Joe: 

So, Mike, let me ask a question around that for government entities : this concept of reporting on a fund basis… can you talk a little bit about the impact the reconciliation of fund balances has on government wide financial statements?

Mike:

Yeah, so anyone who’s worked in governmental accounting is familiar. There are a few types of funds: governmental funds, proprietary funds and fiduciary funds. For instance, governmental funds are a special category where everything is reported as a fund balance, and it’s not on an accrual basis. So, what’s required in sort of a comprehensive annual financial report that governmental entities have to prepare every year is a reconciliation between those fund balances and the full accrual balances that you see on the government-wide financial statements.

For instance, if we use GASB 87 as an example here for fund balance accounting, under governmental funds, the accounting is not really going to change. If they’re going to have cash outflows on a regular basis, say on a monthly basis for lease payment, but they’re not going to be recording assets and liabilities at the fund level.

And so, at the government-wide level, in the Annual Financial Report, you’re going to see all these new lease assets and new lease liabilities. In addition to doing all the new accounting and disclosure work, preparers of government financial statements are now going to have additional items to add to this reconciliation that shows financial statement users how you get from these individual governmental finance fund balances to the government-wide financial statements on an accrual basis.

Joe:

Michael, that sounds burdensome and complex. Can lease accounting technology help in this area?

Mike:

Oh, absolutely. We’ve recommended every client that we’ve worked with –  whether it’s private or public sector – if you have leases of any substance, you’re not doing yourself a favor if you don’t find a lease accounting software solution that works for you, for a multitude of reasons. At a very tactical level, being able to throw all your lease data into a software that’s been built by professionals and experts it can do all the recording, all the reporting, all the calculations for you and can generate all the disclosures that you need for financial statements.

If you try to go without software, and you have any lease population of any substance, you may be able to get to Day One, do all the valuation and come up with what your quote opening balances are for right to use assets and lease liabilities. But all that subsequent remeasurement – when you have lease modifications (adjustments, the addition of new leases), and the reporting is difficult; you’re going to end up spending a lot more resources and time just doing something that’s basically a compliance issue.

Joe:

So, Mike, let’s get under the covers a little bit. What can an organization do to ensure that the system that they’ve set up is properly configured so they can accurately report – and what’s the required data that you’d recommend?

Mike:

So, if you’re considering whether to go with lease software or if you’re trying to do it in Excel (but we recommend lease software, obviously), what you’re looking for are tools that will help you get the right values for the right to use assets and lease liabilities. There are a lot of assumptions, a lot of judgment that goes into determining these that we won’t get into today, but with discount rate assumptions, with lease term assumptions, all these sorts of things that you can build into, that you can put into the tool to help you evaluate, the impact is going to be on the balance sheet.

But beyond that, every month, or whatever your recording requirements may be – processing all of the payments, the interest calculations, the amortization of these new lease assets and all the disclosure requirements that are going to be required – every time you issue financial statements, what you’re looking for is a tool that can do all of these things, essentially, so you can push a button every reporting period, rather than stopping and starting.

If you’re trying to use an Excel-based model, or something other than a piece of software, you’re going to run into all sorts of version control and accuracy issues. So, we do recommend looking for the tool that fits you and your organization, given the population of leases that you have.

Joe:

So, Michael, you know, we’re talking about the tool, and a lot of folks that are going into the project, think of it as a one and done, right? They think, “I’m going to transition from the current standard to GASB 87, and then we’re kind of done.” But that’s not the case, right? I mean, that’s what I call Day 2. What are some of the things they need to think about in terms of managing the data? For instance, the integrity of the data going forward or that they need to put in place so that when they get to their annual audit that the auditors are happy with what they see?

Mike:

Right. What we find is that if we’re looking at, for instance, what Visual Lease will do… if you have this software tool, not only does it do all the calculating, all the reporting, and spitting out the disclosures that you need, because these are things that the auditor is going to review and go through each year. These are things that are required to be a part of your financial statements, but you can also use the tool to manage your lease portfolio.

And what I mean by that is the tool allows you to generate the kind of data and reports that you need to do cash flow forecasting, for budgetary reasons, to do expense projections, all those sorts of things.

And it also provides another tool for you to use as part of your internal controls to control that data integrity that you talked about. To adopt GASB 87, you can get to Day One doing calculations in Excel if you want to. But Day 2-forward is where the problem and the work lies. Using a tool is a critical part of your internal control procedures to act as a gateway for approvals, for signing off on leases…

And not only that, the lease software tool itself also serves as the document repository because one of the most frustrating things during an audit, for auditors and clients alike, is when the auditors want to review copies of agreements or documents. If you’re decentralized or if you haven’t paid enough attention to this or done enough rigor around it, trying to find all the original documents to support what you put in your financial statements can prove to be difficult and time consuming and lead to internal control deficiencies being identified.

Joe:

Michael, in terms of the control environment, one other thing I want to ask you is… think of Visual Lease, as we call it: a point solution. What do you want to have to say that, like integrating with the ERP environment, what are some of your recommendations there?

Mike:

So, we have clients that I’ve worked with that have multiple preferences. Some of them prefer to have a standalone lease system. They say, “this is something that generates what I need for this particular item”. They don’t want to integrate with their general ledger because maybe they don’t have the controls built in, or they don’t want something that feeds into their system that’s not already part of their current system. You can do that if you want to, but it just adds an extra step to it.

What’s great about a tool like Visual Lease is – once you’ve established all the parameters and all the controls around what gets input into Visual Lease, including how those controls are managed, who’s doing the approvals, that you’re comfortable with the data and particularly, if you’ve gotten comfortable with the data… also, after your auditors have been through it a time or two, and they’re comfortable with the outputs from the lease software – entering that into a system takes another manual step out of the equation, and every manual step that you can take out the equation is one less chance for error.

Joe:

Mike – great insights. Any parting thoughts?

Mike:

What I would say to those who haven’t adopted it yet, is that you have a lot of work to do in front of you. You brought up the point earlier that there’s a tendency to think this is a one-time transaction. – I just have to get to adoption date, and then I’m fine. – Adoption is the easy part of it. It’s Day 2 and beyond where there’s a lot of work. And so, if you haven’t gotten that far – haven’t done the planning – get out and start doing that now. Start looking at lease software, start talking to people like Visual Lease and determining what do you need to do to get ready for the standard.

And, although it’s not the topic of discussion today, you know that GASB 96 is coming down the road – and GASB 96 looks a lot like GASB 87, except for software contracts, not leases. But if you can get leases (GASB 87) right, you’re setting yourself up for success with GASB 96. And this is not going to be the end as we know of standards that are coming out to increase transparency and disclosure of these sorts of items. So, get started if you haven’t gotten started yet. If you’ve gotten started, you’re running out of time to adopt the standard. I would just suggest moving as quickly as possible.

Joe:

Great call out on GASB 96, Mike! I have a sense that you and I will be back on the line in the not-too-distant future talking about 96. I really appreciate your time today, Mike, and thanks so much.

Mike:

Thank you.