GASB Statement No. 87, Leases - Part 3

Memorandum # 2022-09

TO: Local Government Finance Officials and Their Independent Auditors

FROM: Susan McCullen, Director, Fiscal Management Section, State and Local Government Finance Division

SUBJECT: GASB Statement No. 87, Leases, Part 3

DATE: March 21, 2022

In June 2021, the North Carolina State and Local Government Finance Division (SLGFD) issued Memorandum #2021-09 and two related GASB 87 Excel Templates, one for lessors and one for lessees. That memorandum provided a walkthrough of the Excel templates to make all of the necessary lease calculations and related general ledger entries in accordance with Governmental Accounting Standards Board (GASB) Statement No. 87, Leases.

This memorandum provides a walkthrough of the changes in a government’s Annual Comprehensive Financial Statements resulting from the implementation of GASB 87. This walkthrough is performed in the Illustrative Financial Statements for the City of Dogwood for the year ending June 30, 2022. The walkthrough assumes that all GASB 87 lease calculations have been completed and that the resulting journal entries were recorded in the City’s general ledger.

Note that the City of Dogwood previously reported two leases as capital leases. Under the new lease guidance, leases are no longer reported as capital leases. As a result, all capital lease-related balances and activity for have been removed from the City’s 2022 illustrative financial statements. These changes will not be addressed in this memo as the use of capital leases by our member units has become uncommon. However, if your unit previously reported capital leases, we recommend that you complete the GASB 87 Excel Templates as instructed in Memorandum # 2021-09 to assist in generating the necessary entries to remove your capital lease balances in 2022 by postinga prior period adjustment to beginning balances..

Trial Balance Crosswalk from GASB 87 Excel Templates – Lessor Lease

The City of Dogwood is a lessor in a lease as defined by GASB 87. Details of the lease are:

In April 2022, the City entered into a lease with a coffee vendor. Under the lease, the coffee vendor pays the City $1,000 per month for sixty months in exchange for operating in the lobby of the City Hall building. In months where the lessee’s gross revenue from the space exceeds $10,000, the lessee makes an additional variable payment equal to five percent of the excess revenue. The lease receivable is measured as the present value of the future minimum rent payments expected to be received during the lease term at a discount rate of 3%, which is the stated rate in the agreement.

These details will appear again in the Note Disclosure Changes Resulting from Lessor Lease section of this memo.

Below is the trial balance crosswalk for this lessor lease using the GASB 87 Excel Template for Lessors and the instructions found in Memorandum #2021-09.

Illustration # 1 – Trial Balance Crosswalk for Lessor Lease

The current portion of the Lease Receivable must be segregated from the non-current portion. This calculation is done by summing the principal portion of the payments due in the next 12 months from the “Lessor Calculations” tab of the GASB 87 Excel Template for Lessors.

Illustration # 2 – Breaking out the Current Portion of the Lease Receivable for Statement Presentation

For our Statement of Net Position, the current portion of our Lease Receivable will be $10,552, and the non-current portion will be $42,511 (total of $53,063.29 in Illustration #1 less the $10,552 current portion calculated above).

Statement of Net Position Changes Resulting from Lessor Lease

There are three new accounts in Exhibit 1 – Statement of Net Position resulting from the lessor lease: Lease Receivable, Lease Receivable – non-current, and Deferred Inflow of Resources – Leases.

Illustration # 3 – Lease Receivable Current and Non-Current in the Statement of Net Position

Illustration # 4 – Deferred Inflows of Resources from Leases in the Statement of Net Position

Statement of Activities Changes Resulting from Lessor Lease

All lease revenue, including variable lease revenue, meets the criteria for program revenues/charges for services under GASB 34, and because this particular lease is within the General Government function, all lease revenue from the lease is included in Charges For Services – General Government in the Statement of Activities. Total lease revenue of $3,141 is included in the highlighted figure below.

Illustration # 5 – Lease Revenue in the Statement of Activities

Interest revenue of $398 on the lease receivable does not meet the definition of program revenues under GASB 34, so it is included in the General Revenues section at the bottom of the Statement of Activities. Because of its immateriality, it is included within Miscellaneous.

Illustration # 6 – Interest Revenue from Leases in the Statement of Activities

Balance Sheet – Governmental Funds Changes Resulting from Lessor Lease

There are two primary presentation differences for the lessor lease between the Statement of Net Position and the Balance Sheet for Governmental Funds. The Lease Receivable is shown in the aggregate in the assets section of the Governmental Funds Balance Sheet, versus split between current and non-current in the Statement of Net Position. The difference between the Lease Receivable and the Deferred Inflows of Resources for leases is shown as a nonspendable fund balance. There are no changes to the reconciliation section of the Statement of Net Position due to the lessor lease.

Illustration # 7 – Balance Sheet – Governmental Funds Presentation of Lessor Lease Amounts

Statement of Revenues Expenditure & Changes in Fund Balance – Governmental Funds Changes Resulting from Lessor Lease

Similar to the Statement of Activities, all lease revenue is included within Sales and Services and interest revenue from the lease is included in Miscellaneous. There are no changes to the reconciliation to the Statement of Activities resulting from the lessor lease.

Illustration # 8 – Lessor changes to Statement of Revenues, Expenditures, and Changes in Fund Balance

Note Disclosure Changes Resulting from Lessor Lease

In note I.E. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Fund Equity, a section is added for the lease receivable that describes the accounting treatment of the lease receivable and the deferred inflows of resources associated with the lease receivable:

“6. Lease Receivable
The City’s lease receivable is measured at the present value of lease payments expected to be received during the lease term. Under the lease agreement, the City may receive variable lease payments that are dependent upon the lessee's revenue. The variable payments are recorded as an inflow of resources in the period the payment is received.

A deferred inflow of resources is recorded for the lease. The deferred inflow of resources is recorded at the initiation of the lease in an amount equal to the initial recording of the lease receivable. The deferred inflow of resources is amortized on a straight-line basis over the term of the lease.”

In the same note I.E, in the Deferred outlows/inflows of resources section of the note, “leases” is added to the list of deferred inflows:

“10. Deferred outflows/inflows of resources
In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, Deferred Outflows of Resources, represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The City has three items that meet this criterion, pension deferrals and OPEB deferrals for the 2021 fiscal year and an unamortized loss on a bond defeasance for Water and Sewer refunding bonds. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, Deferred Inflows of Resources, represents an acquisition of net position that applies to a future period and so will not be recognized as revenue until then. The City has several items that meet the criterion for this category - prepaid taxes, property taxes receivable, leases, and pension and OPEB deferrals.”

In the same note I.E, in the Net Position/Fund Balances section of the note, a subsection for the nonspendable fund balance related to leases is added:

“Leases – portion of fund balance that is not an available resource because it represents the year-end balance of the lease receivable in excess of the deferred inflow of resources for the lease receivable, which is not a spendable resource.”

In note III. Detailed Notes on All Funds, added a detailed description of the lease in accordance with GASB 87:

“4. Lease Receivable
In April 2022, the City entered into a lease with a coffee vendor. Under the lease, the coffee vendor pays the City $1,000 per month for sixty months in exchange for operating its business within a 100 square foot section in the lobby of the City Hall building. In months where the lessee’s gross revenue from the space exceeds $10,000, the lessee makes an additional variable payment equal to five percent of the excess revenue. The lease receivable is measured as the present value of the future minimum rent payments expected to be received during the lease term at a discount rate of 3%, which is the stated rate in the agreement.

In fiscal year 2022, the City recognized $2,790 of lease revenue and $398 of interest revenue under the lease. In addition, the City recognized $351 in variable lease revenue equal to five percent of the lessee’s reported excess revenue during the year.”

In the same note III, in the section for Deferred Inflows and Outflows of resources, a line for leases is added to the deferred inflow chart:

Combined Trial Balance Crosswalk from GASB 87 Excel Templates – Lessee Leases

The City of Dogwood is also a lessee for two leases as defined by GASB 87. We have combined the trial balance crosswalks for the lessee leases into one crosswalk for purposes of this memo. The trial balance crosswalks were generated from the GASB 87 Excel Template for Lessees.

Illustration # 11 – Combined Trial Balance Crosswalk for 2 lessee leases

The current portion of the Lease Liability must be segregated from the non-current portion. This is done by summing the principal portion of the payments due in the next 12 months from the “Lessee Calculations” tab of the GASB 87 Excel Template for Lessees. This current/non-current split is performed in the same manner as it is for the Lease Receivable in an earlier section of this memo. See Illustration # 2.

For our Statement of Net Position, the current portion of our Lease Liability is $8,380, and the non-current portion is $20,291 (total of $28,671 in Illustration #11, less $8,380 current portion).

Also, the Right to use leased asset, net of accumulated amortization, is shown as one line item in the Statement of Net Position. The net Lease Asset is $28,231 ($34,840 less $6,609).

Statement of Net Position Changes Resulting from Lessee Leases

For the City of Dogwood, there is one new account in Exhibit 1 – Statement of Net Position resulting from the lessee leases, Lease Asset net of Amortization. Additionally, the current and non-current portion of the lease liabilities are included in Current portion of long-term liabilities and Long-term liabilities due in more than one year, respectively.

Illustration # 12 – Right to use Leased Assets in the Statement of Net Position

Illustration # 13 – Current and Non-Current Lease Liabilities in the Statement of Net Position

Statement of Activities Changes Resulting from Lessee Leases

Lease Asset amortization expense is included as an expense in the functional area of the lease. Both of the leases are within the General government functional area. The interest expense on the lease liability is included within Interest on long-term debt:

Illustration # 14 – Lease Asset Amortization and Interest Expense on Leases in the Statement of Activities

Balance Sheet – Governmental Funds Changes Resulting from Lessee Leases

The account balances that are added to the Statement of Net Position for the lessee leases (Right to use lease assets, net of amortization, and both current and long-term lease liabilities) are NOT included in the modified accrual basis Balance Sheet for Governmental Funds. Therefore, there are no changes to the Balance Sheet – Governmental Funds resulting from the lessee leases. However, because the account balances are included in the Statement of Net Position, there are two primary changes to the reconciliation of fund balance in the Balance Sheet – Governmental Funds to the Net Position. First, the historical cost of the right to use assets and related accumulated amortization are included as reconciling items after the capital asset reconciling items (see Illustration # 15 below). Second, the lease liability amounts are included in the long-term liability reconciling items (see Illustration # 16 below).

Illustration # 15 – Right to Use Leased Assets in the Reconciliation of Governmental Fund Balance to Net Position

Illustration # 16 – Lease Liabilities in the Reconciliation of Governmental Fund Balance to Net Position

Statement of Revenues, Expenditure & Changes in Fund Balance – Governmental Funds changes resulting from lessee leases

There are three changes to the modified accrual basis Statement of Revenues, Expenditures & Changes in Fund Balance resulting from the lessee leases. The first change is the capital outlay for the right to use assets is classified as an expenditure in the proper fund and functional area. The amount of the outlay is the same as the amount capitalized as a right to use lease asset in the Statement of Net Position. Dogwood’s leases are within the general government function of the General Fund; therefore we have included the capital outlay of $34,840 in the highlighted figure in Illustration # 17 below. The second change is that the principal and interest portions of the lease payments are included within Debt service – Principal and Debt service – Interest, respectively, also highlighted below. The third change is that the addition of lease liabilities during the year, $34,840, is included as an other financing source.

Note that the City of Dogwood previously reported two leases as capital leases. Under the new lease guidance, leases are no longer reported as capital leases. As a result, all capital lease-related balances and activity have been removed from the City’s 2022 illustrative financial statements.

Illustration # 17 – Lessee Changes to Statement of Revenues, Expenditures, and Changes in Fund Balance

There are also three changes to the reconciliation of changes in government-wide net position to changes in governmental fund balance. 1) Capital outlay expenditures for right-to-use lease assets that were capitalized in the government-wide financials net of current year amortization expense, 2) lease liability other financing sources which were an increase in debt in the government-wide financials, and 3) principal debt service payments which were a decrease in debt in the government-wide financials. New reconciling lines are included for the right-to-use assets and amortization whereas lease liabilities issued and debt payments are included in the long-term debt items.

Illustration # 18 – Lessee Changes to the Reconciliation Between Changes in Fund Balance and Changes in Net Position

Note Disclosure Changes Resulting from Lessee Lease

In note I.E. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Fund Equity, a section is added for the right to use lease assets that describes the accounting treatment of the lease assets, including a description of initial measurement and subsequent amortization:

9. Right to use assets
The City has recorded right to use lease assets as a result of implementing GASB 87. The right to use assets are initially measured at an amount equal to the initial measurement of the related lease liability plus any lease payments made prior to the lease term, less lease incentives, and plus ancillary charges necessary to place the lease into service. The right to use assets are amortized on a straight-line basis over the life of the related lease.

In note III. Detailed Notes on All Funds, added a detailed description of the right to use leased assets in accordance with GASB 87, along with a chart showing the individual lease asset balances and accumulated amortization:

6. Right to Use Leased Assets
The City has recorded two right to use leased assets. The assets are right to use assets for leased equipment and leased vehicles. The related leases are discussed in the Leases subsection of the Liabilities section of this note. The right to use lease assets are amortized on a straight-line basis over the terms of the related leases.

Right to use asset activity for the Primary Government for the year ended June 30, 2022, was as follows:

Illustration # 19 – Right to Use Lease Asset Activity Chart for Note Disclosure

In the same note III, in the section for Long-Term Obligations, subsection a. is added for leases that includes a detailed description of each of the lessee leases resulting in a lease liability:

6. Long-Term Obligations
a. Leases
The City has entered into agreements to lease certain equipment. The lease agreements qualify as other than short-term leases under GASB 87 and, therefore, have been recorded at the present value of the future minimum lease payments as of the date of their inception.

The first agreement was executed on July 1, 2021, to lease maintenance vehicles and requires 36 monthly payments of $417. There are no variable payment components of the lease. The lease liability is measured at a discount rate of 8%, which is the stated rate in the lease agreement. As a result of the lease, the City has recorded a right to use asset with a net book value of $8,931 at June 30, 2022. The right to use asset is discussed in more detail in the Intangible Asset section A.6. of this note.

The second agreement was executed on January 1, 2022, to lease a copy machine and requires 60 monthly payments of $403. There are no variable payment components of the lease. The lease liability is measured at a discount rate of 5%, which is the stated rate in the lease agreement. As a result of the lease, the City has recorded a right to use asset with a net book value of $19,300 on June 30, 2022. The right to use asset is discussed in more detail in the Intangible Asset section A.6. of this note.

The future minimum lease obligations and the net present value of these minimum lease payments as of June 30, 2022, were as follows:

Illustration # 20 – Future Minimum Payment Schedule for Note Disclosure

In the same Long-Term Obligation section, the rollforward schedule in subsection f. is modified to include a line for lease liabilities:

Illustration # 21 – Long-Term Liability Rollforward Schedule for Note Disclosure

While not discussed in this memo, please be sure to include the the implementation of GASB 87 in the budget to actual statements as well.

In conclusion, this memorandum along with Memorandum #2021-05, 2021-09 and the GASB 87 Excel templates should provide complete guidance on implementing GASB 87. If you have further questions on this memorandum or any of the guidance provided by the Division, please contact a staff member of the State and Local Government Finance Division staff at 919-814-4300.