GASB 87 Explained w a Full Example of New Lease Accounting

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For example, let’s examine a lease agreement that includes a variable rent portion of a percentage of sales over an annual minimum. At the initial measurement and recognition of the lease, the company is unsure if or when the minimum threshold will be exceeded. Therefore the variable portion of the rent payment is not included in the initial calculations, only expensed in the period paid. The expense for the first two months has been incurred because the company has used the rented equipment or occupied the leased space, but cash for these services has not been paid. The company has recorded rent expense for the first two months of the quarter but they have an accrual for the payment.

  • While a prepaid lease has its benefits, there are things that you need to consider when entering into one.
  • The short-term subscription prepaid represents the value of the subscription to be used over the immediately following 12 months and is amortized after the long-term portion of the prepaid subscription is reduced to zero.
  • In some instances, a one-pay lease can benefit you immensely, but there are some cons as well.
  • You can easily get this information at Edmunds, an invaluable resource for anyone buying or leasing a car.

The software that’s sold with this type of arrangement is often referred to as SaaS, or “Software as a Service,” because of its similarity to service contracts. GTIL is a nonpracticing umbrella entity organized as a private company limited by guarantee incorporated in England and Wales. Using the annual discount rate of 6.5%, the present value of future lease payments (calculated using LeaseQuery’s Present Value Calculator) is $80,378. While the release of the government lease standard coincides with the other new lease accounting standards issued by the FASB and the IASB, the standards don’t exactly mirror each other. This article will walk through the key changes under the lessee accounting model for GASB 87 and provide a comprehensive example of lessee accounting under GASB 87. It will also discuss some basic differences between lessee and lessor accounting.


GAAP standard under ASC 842, Leases (“ASC 842” or “the standard”), many are discovering that they no longer have easy access to the data needed to compute the most common book/tax differences. Prior to implementing ASC 842, many taxpayers have general ledger accounts such as “Deferred Rent” or “Prepaid Rent” that allow visibility into identifying and computing major/book tax differences. The standard also requires companies to take a fresh look at how they are treating leases for GAAP purposes. Thus, the standard not only removes the accounts that used to be used to track book/tax differences—it may create new ones. Most of the dialogue, articles, CPE courses, etc. have concentrated on the GAAP rules and reporting requirements.

  • When the periodic payments are structured so they can not be calculated without the occurrence of an event, such as a number of sales or units produced, the payments are not considered fixed rent.
  • These dates are simply the result of tradition; they don’t have any special significance.
  • What makes it different from a usual lease is that there is usually a prepayment.

It can be considered a tax-efficient method to deal with assets with considerably longer life. Sharon Kay is the National Managing Partner of Grant Thornton LLP’s Washington National Tax Office. In this detailed example, we will walk through the appropriate accounting for a lease as a lessee in accordance with GASB 87 using full accrual accounting. However, if your organization’s leases are recorded within a governmental fund, the modified accrual basis of accounting is used and a conversion entry will be necessary at year-end to create consolidated government-wide financials. The new GASB lease accounting standard for governmental organizations, GASB Statement No. 87, Leases (GASB 87), was proposed during 2017 and released in June of 2017.

Straight-Line Rent Calculations Under ASC 842

In this example, the possession date (and the resulting lease commencement date) is January 1, 2021. Therefore the lessee will only include lease payments to be made on or after the commencement date in the lease liability calculation. The payment made at lease inception (i.e. July 1, 2020) is not included in the lease liability calculation, but instead is accounted for as a prepayment. The total payments for 2021 are $9,167 because the prepayment made on the lease inception date is relieved at lease commencement. Contrast the above total-loss situation with a normal monthly payment lease. If you total your car, the lease company picks up financial responsibility for the difference between what you still owe on the lease and your insurance settlement.

Prepaid LeaseDefinition and Benefits of Prepaying your Lease

Ultimately, by the end of the subscription term, both the long-term and short-term portions of the prepaid subscription account balances will be zero. Typically, when an organization obtains a software subscription, the software vendor incentivizes the organization with favorable pricing if they sign a longer-term commitment and pay for the total contract upfront. Would you rather pay $200 each month for one year or prepay $1,500 for the entire year and save $900?

Is a One-Pay Lease Worth It?

As described above, the treatment of deferred rent, lease incentives and initial direct costs may create new book/tax differences in some circumstances, even though for many leases, there were already differences under the old rules. Another possible new book/tax difference is interest on finance leases. Under the standard, the initial measurement of the right-of-use asset and lease liability is the same for operating and finance leases, while the expense recognition and amortization of the right-of-use asset differ significantly. Under the standard (and for IFRS as well), the income statement will include interest expense on the lease. Thus, if any leases were formerly characterized as operating leases for book purposes but are now finance leases for book purposes, the amount of the book/tax differences may change due to the interest computation.

For example, an organization’s building rent is due by the first of the month. For the check to reach the landlord and post by the first, the organization writes the check the week before on the 25th. When the check is written on the 25th, the period for which it is paying has not occurred. Therefore the check is recorded to a prepaid rent account for the timeframe of the 25th through the end of the month.

Example: Accounting for a lease under GASB 87 with Excel

Accrued expenses, such as accrued rent, are the result of receiving a service or goods before payment is made. As a result, a payable or accrued expense is recognized as a liability. As a rule of thumb, prepaid expenses have been paid but are yet to be realized whereas accrued expenses are incurred but yet to be paid. Part of your borrowed money (the residual value) is “locked up” in the vehicle and can’t be pre-paid in advance.

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