As of the beginning of this year, GASB 87 lease changes have gone into effect. These new lease accounting rules have a substantial impact on government entities and public institutions in higher education, healthcare, and more.
Many organizations, however, are woefully underprepared for GASB 87 compliance. Accounting departments need to understand the extent of their lease portfolio, the data they need for lease calculations, the new accounting methodology required, and how to stay on top of any future lease account changes.
If your organization is impacted by GASB 87 lease accounting changes, here are four crucial things to consider while you work towards compliance.
1. Understand your lease portfolio
For many organizations, getting an accurate picture of the leases they’ve accumulated over the years is a massive burden. Often times, companies have leases across all departments — from IT equipment to office spaces and company vehicles — that are tracked and managed amongst a disparate set of systems. That means you’ll need collaboration across the entire organization to track down all possible sources of leases. Having a centralized view into all of your organization’s leases, however, is crucial for GASB 87 compliance.
When you’re organizing your lease data and documentation, you need to understand, not only what types of leases you have, but whether they’re required to appear on the balance sheet as well. That’s because GASB 87 differs from ASC 842 and IFRS 16 when it comes to short-term leases. For example, under GASB 87, if there is any option to extend a lease past 12 months, regardless of the likelihood to exercise, it is not able to be considered a short term lease. Luckily, GASB 87 lease accounting software can streamline the process of organizing your lease portfolio and understanding how this information needs to be reported on your financial statements.
2. Know what lease data points to collect for GASB 87 compliance
Along with changes to how leases appear within financial statements, GASB 87 lease accounting rules specify new requirements for lease calculations. In order to prepare these calculations, you’ll likely need to collect many different data points across various areas of your organization. Tracking down and extracting these additional data points requires careful planning and communication between many departments within the organization.
In the longer term, capturing this data in a centralized software solution is crucial for minimizing the complexity of lease reporting and ongoing management. That’s why choosing a GASB 87 lease software solution that’s configurable for tracking data points specific to your needs and highly interoperable with other business applications can dramatically streamline lease data collection for your organization. The right lease management software should integrate with leading business systems that various departments within your organization are already using to share and aggregate relevant leasing data. When it comes time to prepare your financial statements, you’ll know exactly where to find the information you need to accurately report your leases under the new requirements.
3. Understand the changes to the balance sheet
The primary goal of the new GASB 87 lease accounting rules is to make leases more transparent within financial statements by including the majority of them on the balance sheet.
For lessees, that means recognizing a lease liability for the present value of the total expense commitment and an intangible asset equal to this lease liability as well as any payments made at the commencement of the lease. As payments are made towards the lease, the liability is reduced and interest expenses are recognized on the income statement. The amortization of the asset and interest expenses are front-loaded, meaning more is recognized in the beginning of the lease term. There are also additional disclosure reporting requirements, which includes lease descriptions, payment schedules, and the amount of total leased assets.
Lessors must recognize a lease receivable equal to the present value of the lease payments expected to be received over the lease term, and a deferred inflow of resources equal to the lease receivable and any additional payments at or before the commencement of the lease. This deferred inflow is recognized as revenue over the life of the lease. As the lessee makes payments, the lease receivable is reduced, and interest income is recognized. Lessors must also include descriptions of leases, lease revenue recognized in the reporting period, and revenue from variable payment components in the disclosures as well.
The GASB 87 lease accounting changes may sound complicated, but a lease management solution can automatically generate these journal entries and additional disclosure reports to simplify the preparation of financial statements. That means organizations that are impacted by GASB 87 can quickly meet the new ongoing accounting and financial reporting requirements.
4. Stay on top of lease changes
When it comes to meeting the GASB 87 lease changes, it’s not just a one-time event. You’ll need to continually manage leases — and their relevant data points — as leases get added, renewed, or cancelled. In addition, payment amounts change with variable rent leases, and other events can impact lease calculations in the future. Managing these changes to your lease portfolio on a day-to-day basis is time-consuming without the proper systems and processes in place.
Most organizations, therefore, need a way for the people who manage leases to modify this lease data from a centralized and intuitive lease management solution. The reality, however, is that many accounting and leasing systems can’t provide these capabilities out of the box. And those solutions that do meet today’s GASB 87 compliance needs aren’t innovating for the future.
If your organization will be impacted by the GASB 87 lease accounting changes, consider a solution like Visual Lease to make compliance straightforward for the long term. Visual Lease has the capabilities necessary for achieving lease compliance, streamlining monthly reporting, and maintaining your lease portfolio. That’s because it’s an intuitive lease management platform that provides seamless integrations with a variety of third-party business applications.
But don’t take our word for it. If you want to see for yourself how Visual Lease can streamline your lease management and compliance requirements, schedule a free demo now.