In the United States, accounting standards for governments are set by the Governmental Accounting Standards Board, a sister but separate organization from the Financial Accounting Standards Board (both are part of the Financial Accounting Foundation, but they operate independently). Originally, GASB basically followed FASB rules as a baseline, then added tweaks where it felt them necessary to account for the unique circumstances of government. In more recent years, however, GASB has developed a comprehensive set of GAAP (generally accepted accounting principles). While the current GASB standard for lease accounting is essentially FAS 13, with the provision that operating rent need not be leveled if the changes in rent are "systematic and rational." Increases intended to cover expected inflation are explicitly within this guidance.
With the development of the new lease accounting standards by the FASB and IASB, the GASB was asked to consider revising its lease accounting standard, since it no longer automatically follows FASB standards. A new project was added to the GASB agenda in April 2013. It incorporated much of the work done by the FASB & IASB, so it moved much more quickly; a Preliminary Views document was posted in November 2014, then an Exposure Draft for a new standard in January 2016. The GASB has now finished its substantive deliberations. At its upcoming meeting May 23-25, they plan to review a preballot draft of a final statement, with the plan for final approval at next month's meeting, June 28-29. The new standard is expected to take effect in 2020, with earlier implementation encouraged.
The proposed GASB standard is a combination of FASB and IASB decisions for their respective new lease accounting standards, with a few GASB-only wrinkles. Some of the major features:
- All leases capitalized, with an exclusion only for short-term leases with a maximum possible lease term (including all available options) of 12 months or less
- Short term leases are not leveled, but rent is recognized as due and paid.
- Definitions of most items, such as lease, lease term, nonlease component, and the like, are generally similar to FASB/IASB definitions
- The "interest rate implicit in the lease" is not specifically defined, and in particular, there is no reference to a lessor's initial direct costs. This probably means that an implicit rate can more readily be determined than under FASB/IASB rules, and in those cases, that rate should be used as the discount rate for the lease.
- A lease with an ownership transfer should be treated as a purchase, not as a lease. (A bargain purchase option is different, and the transaction would still be considered a lease.)
- Future rent commitments, broken out between principal and interest, by year for the first 5 years, then in 5-year increments thereafter.
- Leases of multiple assets which belong to different major asset classes must be separated, because disclosures are required by major asset class.
- If a lease is entered into for investment purposes (such as to sublease the asset for profit), the asset is calculated according to GASB Statement 72.
- A major difference is lessor accounting: the GASB has decided to treat all lessor leases as finance, just like lessee leases. However, the underlying asset is not derecognized, which means that lessors recognize two assets on their books for any leased assets.
- Lessor leases that are subject to regulatory restrictions are not capitalized, but recognized as simple revenue inflows according to the rent terms.
- Transition from old to new accounting for existing operating leases is accomplished by setting up a lease liability and asset as of the beginning of the first comparable period.
FCS will update EZLease to meet the new government lease accounting standard once it is finalized.