Got Leases? For schools and local governments, time for a closer look
By Matthew S. Wildasin, CPA with assistance from senior associate, Jared Wolfgang, CPA
From classroom smart boards and student iPads to big-ticket items like modular classrooms or office space, many school districts and local governments prefer leasing for everything from upgrading tech and other equipment to finding more space for workers or students without building or buying.
But new financial reporting requirements are adding an extra wrinkle: Soon these leases – with few exceptions — will need to be reported on the front of balance sheets along with all other debts and liabilities.
The new guidelines from the Government Accounting Standards Board (GASB), which sets financial reporting standards for state and local governments, are part of a push for heightened transparency.
What impact to future borrowing ability the new requirement will have is an open question. It’s safe to say, however, that it’s worth keeping a closer eye on this kind of debt moving forward.
While the new standards – known as GASB 87 — don’t take effect until after Dec. 15, 2019, there are steps local governments and school districts need to begin making.
Immediate to-do list
Up to now, there’s been a lot of disparity in accounting for leases.
A majority of contracts for office space, photocopiers, computers, etc. were considered operating leases and viewed the same way as renting. As such, they stayed off the books.
No longer. Under GASB 87, only leases 12 months or less are exempt from the new reporting requirements.
Leases that extend more than a year need to show up on the statement of net position (balance sheet) with the following detail:
• Overall lease asset and liability
• Amortization expense from using up the leased asset during the lease
• Periodic interest expense on the lease liability
The change similarly impacts leased income received by local governments or school districts. While not typically in the business of leasing out either property or equipment, if such agreements are in place the following must be detailed:
• A receivable for the right to receive payments
• A corresponding deferred inflow of resources
• Lease revenue, reported systematically over the lease term
• Periodic interest revenue from the receivable
For municipalities, counties and school districts now is the time to start pulling your lease information and begin recording the liability as you would with any other borrowing. A simple Excel spreadsheet showing scheduled payments and asset depreciation can do the trick.
The why behind the change
In adopting the changes, GASB is mirroring similar measures implemented by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), which set guidelines for the private sector.
GASB, FASB and IASB were all concerned that by not having operating leases show up on the front of financial statements – despite the fact that most represent long-term payment commitments – an entity’s accurate debt picture wasn’t clear.
As GASB Chairman David A. Vaudt put it when announcing the new standards earlier this year:
“The new single model for reporting governmental leasing agreements is designed to result in greater transparency and usefulness for financial statement users. It also is meant to reduce complexity in application for preparers and auditors of governmental financial statements.”
In written comments, GASB said the guidance fundamentally changes the definition of most operational leases to put them on par with other assets and liabilities.
The new accounting rules don’t change the fact that leases remain an efficient way to get the technology and equipment governments and school districts need without hurting cash flow. The process remains far less complicated and expensive than traditional borrowings involving bond issues and all the related fees.
At the same time, school district and government officials should keep in mind that the $2 million lease over five years for new computers will be front and center on your balance sheet, along with the rest of the listed debts.
For now, the best advice is to start gathering the information on your leases so you can see what the impact will be on your overall debt picture. It’s also a good idea to touch base with your outside auditor to make sure you’re capturing all needed information and avoid unwanted surprises down the road.