GASB 87 implementation: You’ve got questions, we’ve got answers.

College and university-related organizations are among the first to implement GASB 87 in their June 30, 2022 financial statements. Real estate and equipment of various types (office, medical, lab) are the most common forms of leases we see institutions evaluate for the new standard — and in particular, copier leases.

The number one question we are repeatedly asked is whether your copier leases should be recorded. As if copiers didn’t already give you a headache, the answer is, “Probably, but it depends.” Let’s walk through some of the questions we’re frequently asked using copier leases as the example.

What threshold should I apply to leases?

Your institution should have a policy for leases. This policy should include materiality thresholds, which may or may not align with your capital asset threshold. We’ve seen institutions’ thresholds based on a variety of terms, such as total annual payments, total payments over the life of the lease or the net present value of the lease. We’ve also noticed multiple thresholds applied based on asset type. This is a smart practice, as you may not want to apply the same threshold to real estate as you do equipment.

Example: A university has a policy to record equipment leases with annual payments exceeding $2,500 and real estate leases with annual payments exceeding $100,000. Therefore, any copier leases exceeding $2,500 per year would be recorded (assuming the contract meets the requirements of a lease).

My lease allows the lessor to replace the leased asset at any time with one that is essentially identical. Does this affect the right to use the asset?

The GASB 87 Implementation Guide specifically states that the lease asset is not so much the underlying asset as it is the right to use the asset’s service capacity. Since an essentially identical asset would provide the same service capacity, this meets the definition of a lease in paragraph 4 of Statement 87.

Example: A university has a copier lease allowing for use of any copiers over the period of the lease. The university should apply the same principles to any copier lease exceeding the lease policy threshold. This is regardless of whether the lease specifically identifies copiers or allows for the right to use copiers.

What lease term is used if the lease has options to renew?

If a lease has renewal terms, you should consider at the beginning of the lease how likely you’ll be to exercise the options to renew.

Example: A university tutoring office has a copier lease that does not specifically identify copiers. However, it does allow for the use of copiers over the lease term. The lease term is for 36 months with options to renew for two additional 12-month periods. You consider it reasonably certain that you will extend the lease for the full 60 months, since costs are escalating and any assets requiring maintenance will be replaced. As such, the lease should be recorded based on a 60-month period.

Example: A university graphic design office has a copier lease listing specific serial numbers for assets used. The lease term is for 36 months with options to renew for two additional 12-month periods. Specific assets are identified in the lease and the graphic design office has previously determined that copiers have a useful life of three years. Therefore, you conclude that renewal is unlikely. As such, the lease would be recorded based on a 36-month period.

What should my discount rate be?

Explicit rates should always be used when available. If not, GASB Statements 62 and 87 provide for both the use of the implicit rate or an estimated incremental borrowing rate as acceptable alternatives.

Example: A university has a copier lease that does not explicitly state a discount rate. The university consulted with their banking partners and determined that their effective borrowing rate is 2.8%. It also consulted with peer institutions and found their borrowing rates ranged 2.5% to 4%. The university may apply the 2.8% discount rate to their lease calculation to the copier lease.

Should we record a prior period adjustment to capture the lease activity before the implementation date?

No. Paragraph 94 of Statement 87 indicates that leases should be measured as of the beginning of the period of implementation. For single-year reporting, that would mean evaluating your lease as of July 1, 2021 with no restatement of beginning net position (for comparative financial statements, as of July 1, 2020).

Example: A 60-month copier lease was entered into during 2018 and you prepare comparative financial statements with an MD&A. You will enter the lease with an implementation date of July 1, 2020. At that time, the right to use asset will equal the lease liability for the net present value of the remaining lease payments. Furthermore, your MD&A reflecting three fiscal years will only be adjusted for fiscal years ending 2022 and 2021; fiscal year 2020 will not need to be adjusted. This will be illustrative of the fact that a change in reporting standards occurred during the year of implementation.

We’re sure more questions will arise as the implementation process for GASB 87 continues. When they do, we encourage you to reach out to your higher education CPAs for guidance.


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