The leasing of equipment is a common practice among government entities, allowing them to utilize necessary assets without the need for significant upfront capital expenditure. However, accounting for these leases involves a complex set of standards and guidelines that are crucial in ensuring transparency, accountability, and consistency across all levels of government. The two most notable standards governing this area today are Statement No. 87 (GASB 87) and GASB 96, released by the Governmental Accounting Standards Board (GASB).
Understanding GASB 87 and GASB 96
GASB 87 was issued with the primary objective of enhancing the usefulness of government financial statements by requiring the recognition of certain lease assets and liabilities. It fundamentally alters the way governments account for leases by establishing a single model for lease accounting. This model is based on the foundational principle that leases are financings of the right to use an underlying asset. Before GASB 87, many leases were categorized as “operating leases” and did not appear as liabilities on financial statements. This new standard eliminates the operating lease category for most contracts, increasing the visibility of government obligations.
GASB 96, meanwhile, extends the principles of GASB 87 to subscription-based information technology arrangements. This standard effectively treats these arrangements as leases, recognizing that the rapid evolution of technology has resulted in new types of agreements that share many characteristics with traditional leases.
The Impact of the New Lease Accounting Standards
The introduction of GASB 87 and GASB 96 represents some of the most far-reaching changes GASB has introduced in many years. They require all entities, including governments, to recognize the rights and obligations associated with leasing assets. This includes both short-term and long-term leases, as well as leases of low-value assets.
These changes have aligned government lease accounting standards with those for non-governmental entities, as set by the Financial Accounting Standards Board (FASB). This ensures a greater degree of consistency in how leases are accounted for across different sectors. Furthermore, it enhances the comparability of financial statements, providing investors, lenders, and taxpayers with a clearer picture of an entity’s financial position.
The Auditing Process: Ensuring Compliance with the Standards
The auditing process plays a crucial role in ensuring that government entities adhere to these new lease accounting standards. Auditors review the process for assessing lease contract term options and other criteria to determine whether a lease meets one of the exclusions specified in the standards. They must also identify, locate, review, assess, and communicate various aspects relevant to agreements, leases, and contracts.
This includes reviewing the financial statements to ensure the correct recognition of lease assets and liabilities. Auditors need to verify the accuracy of the calculations used in recognizing these items, such as the discount rate applied and the estimation of the lease term.
In addition, auditors must assess whether the entity has implemented effective internal controls related to lease accounting. This can involve reviewing policies and procedures, testing controls, and evaluating the entity’s risk assessment process.
In conclusion, the government accounting for leased equipment is a well-regulated process, with GASB 87 and GASB 96 providing a robust framework for consistency and transparency. These standards reflect the evolving nature of asset usage in today’s economy, recognizing that leases represent significant financial commitments that should be appropriately reflected in an entity’s financial statements.
The auditing process, meanwhile, serves as an essential check and balance, ensuring that these standards are adhered to and that government entities are held accountable for their lease agreements. As governments continue to rely on leasing as a means of accessing necessary assets, the importance of robust accounting and auditing practices in this area cannot be overstated.