2020 is on the horizon, and the next decade is sure to usher in a fresh perspective and continued change for government agencies. As agencies plan for the next year’s programs, budgets, resources and activities, a critical regulatory update may be flying under the radar.
In 2017, the Government Accounting Standards Board issued GASB 87, Leases, which requires governmental entities to recognize all leases on their balance sheet. For lessees, this is similar to regulations from the FASB and IFRS. Lessees will recognize a right-of-use asset and corresponding lease liability while lessors are required to recognize a lease receivable and a deferred inflow of resources. In simpler terms, the new rules are adding trillions of dollars’ worth of leases to balance sheets for the first time. The goal is to more accurately identify lease obligations and add more transparency for the users of governmental financial statements.
The rules of the new lease guidance from each regulatory body are incredibly complex, and the transition has been fraught for companies and organizations of all sizes. With those challenges in mind, the FASB recently approved a delay to the compliance deadline of ASC 842, Leases for private organizations. Unfortunately, government agencies have no such reprieve in sight. Government agencies and institutions must be in compliance with the new lease accounting standards for reporting periods beginning after December 15, 2019.
For government agencies, the challenges of compliance are confounded by a triple threat of factors: fewer resources, time constraints and expertise. As financial managers are planning for the year ahead, here are the critical considerations to address these concerns.
GASB 87 defines the scope of leased assets to include non-financial assets, such as land, buildings, equipment and vehicles. Many government agencies and institutions are lessors and lessees, with contracts for property, equipment or vehicles. While most institutions have a system of tracking fixed assets, many did not have a similar process for managing operating leases. While the use of the accounts payable department that processes payments on lease contracts will be of assistance, identifying leased assets throughout the organization will likely be a daunting task.
Identifying and categorizing these leases will require a coordinated effort across the full organization, and time is of the essence. A recent LeaseQuery survey of 200 accountants found that 71% of government agencies are only in the early stages of assessing their implementation plans. Organizations should immediately begin assessing their lease portfolio, assembling a lease transition team and establishing a point person who will coordinate across departments to identify and evaluate contracts moving forward.
The ideal lease accounting transition team not only has multi-departmental representation, but also technical expertise. The problem? Most organizations are working with small teams. In fact, according to LeaseQuery’s survey, 56% of organizations only have one or two staff members on their transition team. The reality is, financial departments across most organizations are already spread thin, and this is particularly true in the government sector, where the concept of “doing more with less” is the norm.
Expertise, too, is challenging to find. Many smaller government institutions will need access to professionals who have a deep understanding of the new rules and how to apply them. At large companies, securing additional resources or external help could be as simple as walking down the hall and getting buy-in from a decision maker. In some government agencies, additional resources may need to be secured and budgeted for in advance. In the meantime, finance managers will need to collaborate with the professionals they have access to and seek out available resources from the GASB and other technical experts for assistance.
Organizations should also determine whether they may need a technology solution to optimize their lease accounting transition and processes moving forward. As accounting grows more complex and the new standards take effect, a software solution can be a valuable resource to entities of any size. Lease accounting software helps to ensure not just accuracy but also efficiencies in accounting for lease arrangements, especially if there is a future amendment or renewal.
Hindsight is 2020
Companies who have completed their lease accounting transition consistently report two takeaways. The first is that it was harder than they anticipated, and the second is that they wished they started the process earlier. Government organizations should heed the advice of those who have gone before them and move quickly to ready their processes, tools, and technology—not just for compliance, but for optimization in the future.
Jennifer Booth is the Vice President of Accounting at LeaseQuery, one of the largest providers of purpose-built lease accounting software for the government sector.