GASB 87 Lease Audit Procedures for Governments

Under GASB Statement 87, a government that leases an asset no longer keeps the arrangement off its balance sheet. The Statement treats a lease as a financing of the right to use an underlying asset, and it applies to both sides of the contract. A county can be a lessee of its office space and a lessor of a parking structure in the same year. The audit work follows the model: confirm that every lease is on the list, test the measurement for each side, and trace the results to the financial statements and notes. This guide follows the Statement's own summary, with the CliftonLarsonAllen (CLA) implementation outline and a New Jersey Department of Education notice to school districts for implementation detail.

The model

GASB 87 sets a single model for lease accounting, based on the principle that leases are financings of the right to use an underlying asset. The Statement defines a lease as a contract that conveys control of the right to use another entity's nonfinancial asset, such as land, buildings, equipment or vehicles, for a specified period in an exchange or exchange-like transaction.

Lessee. The lessee recognizes a lease liability and an intangible right-to-use lease asset. It reports amortization expense on the asset over the shorter of the lease term or the useful life of the underlying asset, interest expense on the liability, and disclosures that include a general description of the arrangement, the amount of lease assets and a schedule of future payments.

Lessor. The lessor recognizes a lease receivable and a deferred inflow of resources. It continues to report the leased asset. It recognizes lease revenue systematically over the term, matching the reduction of the deferred inflow, and interest revenue on the receivable. Note disclosures include a general description of the arrangement and the total inflows of resources recognized from leases.

The Statement carves out short-term leases, which have a maximum possible term of 12 months including any options to extend, and leases that transfer ownership of the underlying asset. A lessee does not recognize a liability and asset for either, and a lessor does not recognize a receivable and deferred inflow for them. Identify them in the inventory and document the basis for each treatment.

Effective date

The Statement was first effective for reporting periods beginning after December 15, 2019. GASB Statement 95 postponed it by 18 months, to fiscal years beginning after June 15, 2021, and all reporting periods thereafter (Statement 95, paragraph 4c). The New Jersey notice required school districts to implement the Statement for the fiscal year ending June 30, 2022. An engagement for a later fiscal year treats the Statement as in force and focuses on ongoing completeness and measurement.

Where the audit risk sits

• Completeness of the lease inventory. CLA's implementation outline has governments understand their existing leasing and service contracts, then enter key lease terms into an inventory. Leases hide in service agreements, equipment contracts and agreements with other governments.
• Lease term. Term drives the liability and receivable. Options, renewals and termination rights need to be read.
• Measurement. Payments, incentives, prepayments and initial direct costs enter the asset and liability. Errors in the schedule carry for the life of the lease.
• Lessor side. Governments often overlook their own revenue leases: tower and billboard rights, cafeteria and concession contracts, property rentals.
• Disclosures. Schedules of future payments and totals of inflows have to agree to the ledger.

Audit procedures

1. Test the inventory for completeness. Compare the lease register with accounts payable by vendor, capital outlay, rent and equipment expense accounts, receipts from rental and concession revenue accounts, and board approvals of agreements. Ask legal and department heads about agreements not in the register.
2. Classify. For a sample, read the contract and confirm the conclusion on whether it is a lease, whether it is short-term, and whether ownership transfers.
3. Agree terms. Trace term, payment amounts, escalators, options, incentives and initial direct costs to the contract.
4. Recalculate. Recompute the opening liability or receivable, the asset or deferred inflow, and the amortization or recognition. Test the discount rate: the Statement uses the rate the lessor charges the lessee, which may be the rate implicit in the lease, and a lessee that cannot readily determine that rate uses its estimated incremental borrowing rate.
5. Roll forward. Test additions, modifications, terminations and payments during the year.
6. Tie to the statements. Agree totals in the register to the ledger, the statements and the notes, including the future payments schedule.
7. Check controls. Test the process that flags new and amended agreements to the finance office. CLA's outline lists ongoing processes and controls to maintain the lease inventory as a functional area to set up.

Worked example: the lessee side

Brookhaven Township leases a road grader for five years at $50,000 per year, payable at the end of each year. For illustration, assume a discount rate of 3 percent and no incentives, prepayments or initial direct costs.

At commencement. The present value of five payments is $228,985. The township records a lease liability of $228,985 and an intangible right-to-use asset of $228,985.

Schedule.

The asset is amortized over the shorter of the five-year term and the grader's useful life. If the grader's useful life is 12 years, amortization is $228,985 / 5 = $45,797 a year. If the useful life were four years, amortization would be $57,246 a year over four years and the asset would be fully amortized before the lease ends.

What the auditor tests. The auditor agrees the payment and term to the contract, recomputes the present value and the schedule, and confirms the interest and amortization in the ledger. At year-end 1, the notes show the future payment schedule of principal and interest for years 2 through 5.

A finding. The auditor's search of rental expense accounts finds $24,000 a year paid to a neighboring county for use of a salt storage facility. No lease is in the register. The agreement runs for four years. The auditor asks for the contract, evaluates it against the lease definition and, if it is a lease, proposes the entry.

The lessor side

The auditor tests the same inventory from the revenue side. For a township that leases a cell tower site for $18,000 a year over ten years, the receivable and deferred inflow start at the present value of the payments. Each year, the receivable declines by the cash received less interest, and revenue is recognized as the deferred inflow reduces. The auditor recomputes both sides, confirms that the township continues to report the underlying asset, and agrees the disclosures.

Common misses

• Omitting leases that sit inside service contracts.
• Recording lessor leases as simple rent receipts.
• Using the wrong term when an option is reasonably certain to be exercised.
• Failing to track modifications that change payments or term.

Related reading

See GASB 96 SBITA audit procedures for software subscriptions, which borrow from this model, and GASB 101 compensated absences. For the private-sector counterpart, see ASC 842 lease accounting.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including lease registers, amortization recalculations and completeness reconciliations. The firm keeps the client, the review and the signature. See /us.

Sources

• GASB, Statement No. 87, Leases (June 2017): https://d2x0djib3vzbzj.cloudfront.net/GASBS87.pdf
• GASB, Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance (May 2020): https://storage.gasb.org/GASBS%2095.pdf
• CliftonLarsonAllen, GASB 87 Leases: A Practical Outline for Implementation: https://www.claconnect.com/en/resources/articles/2019/gasb-87-leases-a-practical-outline-for-implementation
• New Jersey Department of Education, Implementation of GASB Statement No. 87, Leases (December 22, 2021): https://www.nj.gov/education/broadcasts/2021/dec/22/ImplementationofGASBStatementNo87_Leases.pdf

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