Question

I need some help answering those questions in regards to GASB new standard on lease accounting

1. What was the purpose of this new standard and what types of organizations would be affected by it?
2. What prompted GASB to address this issue (Note: Background information can be found in Appendix A)?
3. What factors did the Board consider significant when reaching the conclusions in this Statement (See Appendix B)?
4. How is the Statement 87 lease accounting different from the previous accounting treatment of leases?
5. Do you agree with the changes in lease accounting? Why or why not?

I would appreciate any help.

Answer 1

a. Through the new GASB standard on leases, the Board seeks to align the accounting and financial reporting of lease transactions more closely with their economic substance. The guidance is based on the underlying principle that leases are financings of the right to use an underlying asset for a period of time. It will eliminate the current distinction between operating and capital leases by treating all leases as financings.

b. The FASB standards are effective for public companies starting in 2019 and for nonpublic companies in 2020. GASB Statement No. 87, Leases, provides guidance for lease contracts for non financial assets—including vehicles, heavy equipment, and buildings — but excludes non exchange transactions, including donated assets, and leases of intangible assets (such as patents and software licenses).

c. Government entities must report an amortization expense for leased assets within the operating costs section of the income statement and an interest expense for lease liabilities within the finance costs section of the income statement. This will cause the expenses for leases to be front-loaded as the amount of interest is reduced over the term of the contract. GASB requires lease liabilities to be reported as long-term debt, so it may impact debt covenants and debt to equity ratios.

d. The differences between GASB and FASB reporting may impact certain industries, like health care and higher education.

e. Differences:

1. GASB eliminates the operating lease classification all together, requiring all leases to be reported as finance leases as against FASB retains the dual classification of operating and finance leases.

2. GASB requires that interest expense on the lease liability and amortization expense on the lease asset be front-loaded on the income statement as compared to straight-line the expense on operating leases under FASB

3. GASB classifies lease payments as capital financing outflows as compared to  lease payments as operating outflows under FASB.

f. We agree with the changes in lease accounting because GASB considers the economic substance of a lease contract over its legal form and is more indicative of the actual scenario.