Accounting Guidance and Clarification regarding GASB 87 Leases and GASB 96 Subscription-Based IT Arrangements (SBITAs)
Background Information on Leases and SBITAs
The Governmental Accounting Standards Board (GASB) released GASB Statement #87 – Leases (S87) in June 2017 and GASB Statement #96 – Subscription-Based Information Technology Arrangements (S96) in May 2020. For AFR reporting purposes, S87 was required to be reported beginning with the 2021-2022 AFR while S96 was reported beginning with the 2022-2023 AFR. Historically, leases were categorized as either capital or operating leases while Subscription-Based IT Arrangements (SBITAs) were expensed as incurred.
S87 established a single lease accounting model based on the principle that leases are financing 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.
S96 is similar to S87 in that the standard established an accounting model for SBITAs based on the principal that they are financings of the right to use another entity's asset. In applying S96, contracts that convey control over another entity's IT software used either alone or in combination with underlying IT assets for a period of time in an exchange or exchange-like transaction are considered SBITAs. Governments are required to recognize a SBITA liability and an intangible right-to-use SBITA asset. Unlike S87, software and underlying IT assets that the government may provide to another entity under a right to use agreement are excluded from S96.
LEAs should consult with their auditors for assistance in determining which leases or contracts fall within the scope of GASB 87 and GASB 96.
Impact on School Accounting
How to apply S87 and S96 to AFR reporting in the Financial Statements and the Statement of Indebtedness (SOIN) Schedule can be found below.
Sample Accounting Entries and Explanations
Journal Entry #1: Entry to Record Initial Lease/SBITA
|Debit – Capital Outlay Expenditure||*XXXX-73X||$50,000|
|Credit – Lease/SBITA Proceeds||9220||$50,000|
- The lease/SBITA liability is calculated at the inception of the agreement per S87 or S96 criteria.
- The full amount calculated above is recorded to the Governmental funds as both an expenditure for capital outlays (expenditure object code 73X) 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/SBITA, ex: function 2600 for a building lease; function 2700 for a bus lease. Please use the applicable 73X object codes for all leases/SBITAs reported in FY22-23.
Journal Entry #2: Entry to Record Lease/SBITA Payments
|Debit – Lease/SBITA Principal Expenditure||5140-910||$10,000|
|Debit – Lease/SBITA Interest Expenditure||5140-830||$1,500|
|Credit – Cash||0101||$11,500|
- Monthly/subsequent payments on leases/SBITAs are accounted for in a manner similar to debt service payments.
- All payments on leases/SBITAs 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/SBITA
|Debit – Lease/SBITA Asset||$50,000|
|Credit – Lease/SBITA Liability||$50,000|
Journal Entry #4: Entry to Record Lease/SBITA Payments
|Debit – Lease/SBITA Liability||$10,000|
|Debit – Interest Expense||$1,500|
|Credit – Cash||$11,500|
Journal Entry #5: Entry to Record Lease/SBITA Amortization
|Debit – Amortization Expense||$10,000|
|Credit – Accumulated Amortization||$10,000|
SOIN Schedule Lease/SBITA Debt Disclosure
The present value of any new leases or SBITAs initiated during the 2022-23 FY should be reported on the SOIN as Leases and Other Right-to-Use Arrangements "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). See sample journal entry #1 above.
Any lease and SBITA "Reductions During FY" or "Interest Paid During FY" reported on the SOIN should match the lease and SBITA payments recorded in expenditure function 5140 on the AFR. See sample journal entry #2 above.
Additional validations have been added to the 2022-23 AFR to perform the following data comparisons. AFRs will be returned for correction if material variances are found with unacceptable justifications:
- Revenue Code 9220 should be comparable to SOIN Lease and Other Right-to-Use Arrangement, Additions During FY
- The total of expenditure objects 73X should be comparable to SOIN Lease and Other Right-to-Use Arrangement, Additions During FY
- Expenditure Code 5140-910 should equal SOIN Lease and Other Right-to-Use Arrangement, Principal Reductions During FY
- Expenditure Code 5140-830 should equal SOIN Lease and Other Right-to-Use Arrangement, Interest Paid During FY
AFR Data Utilization
- Any state calculations utilizing AFR data will be completed with the assumption that the lease/SBITA reporting guidance provided above has been followed.
Questions regarding the effects of S87 or S96 on PDE subsidy calculations will be addressed by Benjamin Hanft in PDE's Division of Subsidy Administration