What Is a GASB 87 Lease?

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Written By SmarterrMoney.org

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A GASB 87 lease is any lease that must be recorded on a lessee’s financial statements, according to Government Accounting Standards Board Statement No. 87.

Municipality leases fall under GASB 87 

There is no longer a distinction between operating and capital (or financing) leases. 

Any contract that provides control of the right to use a lessor’s nonfinancial asset for a set period in an exchange or exchange-like transaction is a GASB 87 lease.

A lease that must be reported according to GASB 87 lease must meet certain criteria. 

A lease that gives the lessee control over the right to use a nonfinancial asset, such as a building, land, vehicle, or machinery — (1) gives you the ability to direct how the asset is used, and (2) you receive the benefits of the asset. Both criteria must be met for a lease to be a GASB 87 lease. 

Secondly, if that same transaction is an exchange or exchange-like transaction, it’s a GASB 87 lease. Exchange or exchange-like transactions mean that each party gets some asset (e.g., payment, use of equipment) of equal or near-equal value. 

GASB 87 excludes certain leases from the lease accounting guidelines, including leases of inventory, intangible assets, and biological assets. Note that entities adhering to GASB standards should have implemented GASB 87 reporting with their fiscal 2022 (ending June 30, 2022) financial statements. 

CRITERIA:There are two factors for determining whether a lease is a GASB 87 lease ⁠— (1) control over the right to use a physical asset; and (2) an exchange or exchange-like transaction. If you control and get the benefits of the physical asset that you don’t own, the first standard is met. If you agree to an exchange of equal value, such as monthly cash payments for the use of the asset, the second standard is met, and it’s a GASB 87 lease.

GASB 87 requires lessees to recognize a lease liability measured as the present value of future payments expected over the lease term and an intangible right-to-use leased asset measured as the initial amount of lease liability, plus any payments made to the lessor and minus any lease incentives received from the lessor. 

Similarly, a lessor is required to recognize a lease receivable and a deferred inflow of resources. The lease receivable is measured identically to how a lessee’s lease liabilities are measured, and deferred inflow of resources is measured exactly how a lessee’s right-of-use leased assets are measured.

What’s important here?

When a lease agreement provides a lessee control of the right to use a lessor’s nonfinancial asset for a set period in an exchange or exchange-like transaction, it is a GASB 87 lease.