As noted in an earlier blog entry, the Governmental Accounting Standards Board (GASB) has decided to develop its own lease accounting standard, rather than relying on the FASB standard. This week, GASB released Statement 87, Leases. It is available on the GASB website.
As previously mentioned, the new standard takes effect in 2020, one year later than ASC 842 & IFRS 16, which were released nearly a year and a half ago. GASB 87 capitalizes all lessee leases, like IFRS 16 (with the same exclusion for short-term leases, which must be no more than 12 months including all available options), and also capitalizes all lessor leases. Existing operating leases are capitalized based on the remaining rent at the beginning of the first comparative period, like ASC 842. Other aspects of GASB lease accounting borrow heavily from ASC 842 and IFRS 16 (particularly definitions), but have their own distinctives as well. It will take some time to work through the details. (See Governmental lease accounting approaches new standard for more details on the new standard.)
The determination of the discount rate to use for the lease seems to be closer to FAS 13 than ASC 842/IFRS 16. GASB 87 calls for using "the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease" (¶ 23). GASB 87 makes no reference to a lessor's initial direct costs in determining the implicit rate. If no such interest rate can be readily determined, the incremental borrowing rate should be used. However, the wording of this, along with general guidance in GASB 62 on imputed interest and valuation in ¶173-187, suggests that the FAS 13 methodology of not allowing the asset value of a lease to exceed the fair value of the underlying asset, and recalculating the discount rate for that purpose if needed, should be applied under GASB 87. I'll keep my eyes open for whether the Big Four accounting firms issue any practice guides on GASB 87 that would present their take on this issue.
We value our government customers, which include two U.S. state governments as well as other governmental entities. We will update our EZLease lease accounting software to meet the specific requirements of GASB 87 in the coming months.