Accounting Guidance and Clarification regarding the GASB 87 New Lease Standard

Background Information on Leases

In June 2017, the Governmental Accounting Standards Board (GASB) released GASB Statement #87 – Leases (S87). For AFR reporting purposes, the change was required to be reported on the 2021-2022 AFR. Historically, leases were categorized as either capital or operating leases. Generally, if the risks and benefits of ownership of the underlying asset were transferred to the lessee then the lease was essentially considered a financed purchase of an asset and accounted for as a capital lease. All other leases were considered operating leases. S87 established a single lease accounting model based on the principle that leases are financings of the right to use an underlying asset. S87 defines a lease contract as a contract that “conveys control” of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange‐like transaction. A lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources. Old capital leases that transferred ownership will be reported as capital financing activities instead of being called leases.

LEAs should consult with their auditors for assistance in determining which leases or contracts fall within the scope of GASB 87 to be reported as leases.

Impact on School Accounting

During initial reviews of the 2021-22 AFRs by the Comptroller’s Office (OCO), it has become evident that additional guidance is needed on the implementation of the new standard and how to apply it to AFR reporting in the Financial Statements and the Statement of Indebtedness (SOIN) Schedule. The information below is meant to help clarify reporting in the initial Year of Implementation and Ongoing.

Sample Accounting Entries and Explanations

Governmental funds:

Journal Entry #1: Entry to Record Initial Lease

• The lease liability is calculated at the inception of the lease per S87 criteria.
• The full amount calculated above is recorded to the Governmental funds as both an expenditure for capital outlays and an Other Financing Source as proceeds from leases and other right to use arrangements (revenue code 9220).
  
  *The expenditure function code used for the capital outlay will depend on the type of lease, ex: function 2600 for a building lease; function 2700 for a bus lease. Please use object code 790 for all leases reported in FY21-22. A new object code 730 will be created specifically for leases to be used beginning in FY22-23.

• Leases/contacts/agreements existing prior to GASB 87 implementation: S87 does not require the recognition of the Other Financing Source and capital outlay expenditure in the Governmental funds for leases existing prior to implementation of the statement. Therefore, there are two acceptable methods to account for leases that were in effect prior to 7/1/21. It is at the discretion of the LEA and their auditor to determine which method to utilize.

1. The remaining lease liability of the existing lease(s) can be accounted for as shown in sample journal entry #1 above, or
   
2. The remaining lease liability of the existing lease(s) is not recognized, and no journal entry is needed to account for the Other Financing Source and capital outlay expenditure.
   

Journal Entry #2: Entry to Record Lease Payments

• Monthly/subsequent payments on leases are accounted for in a manner similar to debt service payments.
• All payments on leases are to be accounted for in expenditure function 5140 and should not be included in any other functional expenditure code.

Government-wide and proprietary funds:

Journal Entry #3: Entry to Record Initial Lease

Journal Entry #4: Entry to Record Lease Payments

Journal Entry #5: Entry to Record Lease Amortization

SOIN Schedule Lease Debt Disclosure

The present value of any new leases initiated during the 2021-22 FY should be reported on the SOIN as Lease “Additions during FY”. This amount should also be reported as an Other Financing Source in revenue code 9220 on the AFR along with the same amount reported in the applicable capital outlay expenditure code(s) for the leased item. See sample journal entry #1 above.

The present value of any leases existing prior to GASB 87 implementation should be reported on the SOIN as Lease “Amount at FY Start” on the 2021-22 FY AFR. Note: This amount would only be reported in revenue code 9220 and as a capital outlay expenditure if the LEA has chosen to recognize the present value as such. See notes in sample journal entry #1 above.

Any lease “Reductions during FY” or “Interest Paid During FY” reported on the SOIN should match the lease payments recorded in expenditure function 5140 on the AFR. See sample journal entry #2 above.

The following data comparisons will be checked for accuracy during OCO’s FY21-22 AFR review process. AFRs will be returned for correction if material variances are found:

• Revenue Code 9220 should be comparable to SOIN Lease Additions during FY
  Note: Revenue code 9220 could also contain amounts reported on the SOIN as Lease Amount at FY Start if an LEA has chosen to recognize existing leases from a prior year as an Other Financing Source and capital outlay expenditure in FY21-22.
  
• Expenditure Code 5140-910 should equal SOIN Lease Principal Reductions during FY
• Expenditure Code 5140-830 should equal SOIN Lease Interest Paid during FY

AFR Data Utilization

• Any state calculations utilizing AFR data will be completed with the assumption that the lease reporting guidance provided above has been followed.
• Questions regarding the effects of S87 on PDE subsidy calculations will be addressed by Benjamin Hanft in PDE’s Division of Subsidy Administration.

AFR Corrections

• Please review this additional guidance and contact RA-Schlfin@pa.gov if you find that data was reported in error and would like to have your FY21-22 AFR returned to make corrections.