GASB 87

February 7, 2025

GASB 87 significantly reshapes lease accounting for governmental entities, introducing a single model that aligns financial reporting with a more consistent framework. Under this standard, both lessees and lessors must recognize lease assets and lease liabilities on their balance sheets, ensuring greater transparency in financial statements. By requiring entities to assess lease contracts based on the present value of lease payments and the term of the lease, GASB 87 enhances comparability and accountability in governmental financial reporting.

What is GASB 87

In 2019, the latest Governmental Accounting Standards Board (GASB) lease accounting standard, GASB 87, began to go into effect for most U.S. state and local government agencies, including certain health care, and higher education institutions. Among other requirements, GASB 87 required that most leases be capitalized and recorded on the balance sheet, changed how they’re reported, and eliminated most operating (non-capitalized) leases.

GASB 87 is a lease accounting standard issued by the Governmental Accounting Standards Board (GASB) to enhance the financial reporting of leasing arrangements for state and local governments. It establishes a single model for lease accounting, requiring lessees to recognize a lease asset and a lease liability, while lessors report a lease receivable and a deferred inflow of resources. This approach eliminates the previous distinction between operating leases and capital leases, ensuring that all leasing arrangements are accounted for consistently. The standard applies to lease agreements involving nonfinancial assets, such as buildings, equipment, and land, provided the arrangement conveys control of the underlying asset for a specified period of time.

By requiring lease obligations to be recognized on the balance sheet, GASB 87 enhances financial statement transparency and comparability across governmental entities. The present value of lease payments is used to measure lease liabilities, and related lease assets are amortized over the term of the lease. This change affects fiscal years beginning after the standard’s effective date and applies to both new lease contracts and existing agreements. GASB 87 also introduces disclosure requirements, ensuring that financial reporting provides detailed information on leasing arrangements, lease incentives, and future lease payments.

Why is GASB 87 Important?

GASB 87 is important because it increases transparency and accountability in governmental financial reporting by requiring entities to recognize lease obligations on their balance sheets. Previously, many lease agreements were classified as operating leases and reported only in the notes of financial statements, making it difficult to assess the full financial impact of leasing arrangements. By eliminating the distinction between operating and capital leases, the standard ensures that all significant leasing obligations are reflected in financial statements, improving comparability across government entities. This change helps stakeholders, including taxpayers, investors, and oversight bodies, gain a clearer understanding of a government’s financial commitments and long-term liabilities.

The implementation of GASB 87 also enhances decision-making by providing a more accurate representation of an entity’s financial position. Recognizing lease assets and lease liabilities allows governments to better assess their use of leased capital assets, monitor lease payments, and evaluate the financial impact of leasing versus purchasing. Additionally, the standard aligns governmental lease accounting with best practices used in the private sector under ASC 842, creating consistency across different financial reporting frameworks. By improving financial reporting reliability, GASB 87 supports more informed budgeting, planning, and resource allocation for state and local governments.

Key Components of GASB 87

GASB 87 introduces a comprehensive framework for lease accounting that standardizes financial reporting for state and local governments. The standard requires lessees to recognize a lease asset and a lease liability, while lessors must record a lease receivable and a deferred inflow of resources. By using the present value of lease payments to measure lease liabilities, GASB 87 ensures that leasing arrangements are consistently reported across financial statements. This approach eliminates the previous distinction between operating leases and capital leases, promoting greater transparency in governmental accounting.

Several key components define GASB 87’s approach to lease accounting:

• Single Model for Leases – Requires lessees and lessors to follow a unified accounting model, removing the distinction between operating and capital leases.
• Lease Asset and Lease Liability Recognition – Lessees must recognize a right-of-use asset and a corresponding lease liability based on the present value of lease payments.
• Lease Receivable and Deferred Inflow of Resources – Lessors recognize a lease receivable for expected future lease payments and a deferred inflow of resources representing the revenue recognition timing.
• Measurement of Lease Liabilities – Lease liabilities are based on the present value of future lease payments, factoring in the term of the lease and interest rates.
• Applicability to Nonfinancial Assets – The standard applies to leases of tangible nonfinancial assets, such as land, buildings, and equipment.
• Exclusion of Short-Term Leases – Leases with terms of 12 months or less are excluded and expensed as incurred.
• Disclosure Requirements – Governments must provide detailed disclosures on leasing arrangements, including future lease payments and amortization of lease assets.

These components collectively enhance the accuracy and comparability of financial reporting for governmental entities, ensuring that lease obligations and assets are clearly reflected in financial statements.

Benefits of GASB 87

GASB 87 provides several benefits to governmental entities by improving the transparency and consistency of lease accounting. By requiring leases to be recognized on the balance sheet, the standard ensures that financial statements provide a clearer picture of an entity’s financial position. This change enhances accountability, as stakeholders—including taxpayers, regulators, and investors can better assess the financial impact of leasing arrangements. Additionally, the standard simplifies lease classifications by eliminating the distinction between operating and capital leases, making financial reporting more straightforward and comparable across entities. The implementation guide for GASB 87 provides clarity on applying the standard, ensuring consistency in recognizing lease assets, lease liabilities, and related outflows of resources.

Another key benefit of GASB 87 is its role in improving financial decision-making. Recognizing lease assets and lease liabilities helps governments better evaluate their long-term financial commitments and optimize the use of leased capital assets. The requirement to measure lease liabilities based on the present value of future lease payments provides a more accurate representation of financial obligations, allowing for better budgeting and resource allocation. Additionally, GASB 87 aligns governmental accounting with private-sector standards like FASB’s ASC 842 and GASB 96, ensuring a standardized approach to lease accounting across different frameworks. Entities must also account for journal entries related to lease payments, interest expense, and amortization of lease assets, further reinforcing financial reporting accuracy.

Examples of GASB 87

GASB 87 applies to a wide range of leasing arrangements involving nonfinancial assets, such as buildings, land, and equipment. For example, when a local government enters into a lease contract for office space, it must recognize a lease asset and a corresponding lease liability based on the present value of future lease payments. Similarly, a school district that leases buses for student transportation must report these leased vehicles as right-of-use assets on its balance sheet. The implementation guide for GASB 87 provides clarity on how to classify leases, ensuring consistency in financial statements. By requiring both lessees and lessors to account for leases uniformly, GASB 87 improves financial reporting and enhances comparability across governmental entities.

Lessors are also required to recognize lease receivables and deferred inflows of resources under GASB 87. For instance, if a municipality leases a government-owned warehouse to a private business, it must record a lease receivable representing the expected payments and a deferred inflow of resources to reflect the timing of revenue recognition. Additionally, conduit debt arrangements related to leasing must be reported appropriately to ensure transparency in financial statements. The standard also addresses exchange-like transactions where a lease contract may involve consideration that is not purely financial. These examples highlight how GASB 87 applies across different scenarios, ensuring that governmental entities properly account for interest expense, journal entries, and other financial reporting elements related to leasing.

Common Examples of GASB 87 in Practice

• Office Space Lease – A city government leases an office building and records a lease asset and lease liability.
• Equipment Lease – A fire department leases firefighting equipment and recognizes it as a right-of-use asset.
• School Bus Lease – A school district enters into a lease agreement for buses and reports them as leased capital assets.
• Warehouse Lease by Municipality – A local government leases out storage space, recording a lease receivable and a deferred inflow of resources.
• Technology Lease – A county leases IT infrastructure, recognizing the present value of future lease payments.
• Land Lease for Public Use – A government agency leases land for public projects and accounts for lease expenses accordingly.
• Short-Term Leases Exemption – A city signs a 10-month lease for temporary office space, which is expensed rather than recorded as an asset.

Key Challenges of GASB 87

Implementing GASB 87 presents several challenges for governmental entities, particularly in lessee accounting and lessor accounting, where lease assets and liabilities must be properly classified. One of the main difficulties is determining the definition of a lease, as organizations must assess whether an agreement conveys control of the underlying asset for a specified reporting period. This can be particularly complex when dealing with supply contracts or intangible assets, which may contain embedded lease components. Additionally, the commencement of the lease requires careful calculation of lease liabilities and right-of-use assets based on the present value of future payments.

Common Challenges of GASB 87 Implementation

• Lease Classification – Identifying whether an agreement meets the definition of a lease and involves control of the underlying asset.
• Commencement of the Lease – Properly recording lease liabilities and lease assets from the start of the agreement.
• Supply Contracts and Embedded Leases – Determining whether contracts contain lease components that must be accounted for separately.
• Intangible Assets – Addressing complexities related to leases involving nonphysical assets, such as software or licensing agreements.
• Reporting Period Adjustments – Ensuring lease obligations are accurately reflected across different financial reporting periods.

GASB 87 Best Practices

To ensure compliance with GASB 87, governmental entities should adopt best practices that streamline lease accounting and improve financial reporting accuracy. Properly classifying lease agreements is critical, as organizations must assess whether a contract meets the definition of a lease and conveys control of the underlying asset. Establishing a clear process for tracking lease terms, payment schedules, and the commencement of the lease helps ensure accurate recognition of lease assets and liabilities. Additionally, leveraging technology, such as lease management software, can simplify calculations and automate the recording of lessee accounting and lessor accounting transactions.

Key Best Practices for GASB 87 Implementation

• Centralize Lease Data – Maintain a centralized database of all lease agreements, including key terms, renewal options, and lease modifications.
• Standardize Lease Classification – Develop internal guidelines to consistently assess whether an agreement meets the definition of a lease.
• Monitor Lease Commencement Dates – Track the start date of each lease to ensure proper recognition of assets and liabilities.
• Utilize Technology for Compliance – Implement lease management software to automate calculations, journal entries, and reporting.
• Review Financial Reporting Periods – Align lease accounting with financial statement reporting periods to ensure accurate disclosures.
• Train Accounting Personnel – Provide ongoing training on GASB 87 requirements to ensure consistent application of lessee and lessor accounting principles

GASB 87 FAQ

When must GASB 87 be implemented?

What is considered a lease under GASB 87?

What is the difference between a capital lease and an operating lease?

Under a capital lease, the leased asset is treated as if it were purchased, meaning the lessee records both a lease asset and a lease liability on the balance sheet. In contrast, an operating lease does not result in asset or liability recognition under older standards, though GASB 87 now requires most leases to be recognized as lease assets and liabilities.

What are the four criteria for a capital lease?

Before GASB 87, lease classification was based on specific tests, including whether the lease term covered most of the asset’s life, if ownership transferred at the end of the lease, if there was a bargain purchase option, or if the present value of lease payments was a substantial portion of the asset’s fair value. GASB 87 now removes these distinctions and treats most leases as financing arrangements.

What is an example of an operating lease?

An example of an operating lease under previous standards would be a company renting office space where the lease did not transfer ownership or substantially all the risks and rewards of the asset. Under GASB 87, such leases are now accounted for as lease assets and liabilities.

What are the five conditions for a finance lease?

If a lease meets any of these conditions, it was historically classified as a finance lease:

1. The lease transfers ownership at the end of the term.
2. The lease includes a bargain purchase option.
3. The lease term covers most of the asset’s useful life.
4. The present value of lease payments covers substantially all of the asset’s fair value.
5. The leased asset is specialized with limited alternative uses.

What are the two types of capital leases?

There are two primary types of capital leases:

• Direct Financing Lease – The lessor records a lease receivable instead of an asset and recognizes interest income over time.
• Sales-Type Lease – The lessor recognizes profit upfront and records a lease receivable for future payments.

How do you determine if a lease is capital or operating?

Under previous standards, a lease was classified as capital if it met specific financial criteria. GASB 87 eliminates this distinction and requires most leases to be accounted for as lease assets and liabilities, except for short-term leases of 12 months or less.

Why is an operating lease sometimes preferable?

Operating leases were historically preferred because they did not appear as liabilities on the balance sheet, reducing reported debt. However, GASB 87 now requires most leases to be recognized, reducing the advantage of operating lease treatment.

What are the IRS rules for capital leases?

The IRS considers a lease to be a capital lease if it transfers ownership or provides a bargain purchase option. Under tax law, depreciation and interest expense can be deducted on capital leases, whereas operating leases are treated as standard business expenses.

Is office rent considered an operating lease?

Office rent was traditionally classified as an operating lease because it did not transfer ownership of the asset. However, under GASB 87, most office rental agreements must now be recorded as lease assets and lease liabilities.

Why would a company choose a capital lease?

Companies may choose a capital lease when they want to retain long-term control over the leased asset and benefit from tax deductions for depreciation and interest expenses. However, GASB 87 requires governmental entities to recognize lease obligations regardless of whether they were previously classified as capital or operating leases.