Leases under GASB 87 and subscription IT arrangements under GASB 96

• Measure a lessee's lease liability and intangible right-to-use asset under GASB 87
• Record a lessor's lease receivable and deferred inflow of resources
• Classify SBITA implementation outlays into the three GASB 96 stages
• Design completeness procedures for leases and subscriptions

One model for leases

GASB Statement No. 87 treats leases as financings of the right to use an underlying asset. There is no operating or finance classification. A lease is a contract that conveys control of the right to use another entity's nonfinancial asset (buildings, land, vehicles, equipment) for a period of time in an exchange or exchange-like transaction.

Lease term is the noncancelable period plus periods covered by options to extend or terminate when it is reasonably certain, based on all relevant factors, how the lessee or lessor will act. A fiscal funding or cancellation clause affects the term only when it is reasonably certain to be exercised.

Short-term leases have a maximum possible term under the contract of 12 months or less, including any options to extend, regardless of how likely they are to be exercised. Payments are recognized as outflows or inflows of resources based on the contract terms.

Lessee accounting

At commencement the lessee recognizes:

• a lease liability at the present value of payments expected during the lease term, less lease incentives, discounted at the rate the lessor charges or, if that is not readily determinable, the lessee's estimated incremental borrowing rate; and
• an intangible right-to-use lease asset at the initial liability plus payments made at or before commencement and certain direct costs.

Payments reduce the liability, interest is recognized on it, and the asset is amortized over the shorter of the lease term and the asset's useful life. In governmental funds, an expenditure and an other financing source are reported when the lease is first recognized, and later payments are expenditures.

Lessor accounting

The lessor keeps the underlying asset on its books and recognizes a lease receivable at the present value of payments expected, plus a deferred inflow of resources equal to the receivable plus payments received at or before commencement that relate to future periods. It then recognizes interest revenue on the receivable and lease revenue from the deferred inflow systematically over the term. Exceptions apply to short-term leases, leases of assets held as investments, certain regulated leases and leases that transfer ownership.

Modifications, terminations and other features

An amendment that decreases the lessee's right of use is a partial or full termination, with a gain or loss. Other amendments that are not separate leases are remeasurements. Lease and nonlease components (such as maintenance services) are accounted for as separate contracts unless the government cannot practicably estimate the price of each component, in which case the nonlease payments are combined with the lease payments. A sale-leaseback qualifies only if it includes a sale; otherwise it is a borrowing.

SBITAs under GASB 96

GASB Statement No. 96 (effective for fiscal years beginning after June 15, 2022) applies the lease model to subscription-based information technology arrangements: contracts conveying control of the right to use a vendor's IT software, alone or with tangible assets, for a period in an exchange or exchange-like transaction. The government recognizes a subscription liability and an intangible subscription asset at the commencement of the subscription term, which is when the asset is placed into service.

The subscription asset equals the initial liability, plus payments to the vendor before commencement, plus capitalizable implementation costs, less vendor incentives. Outlays other than subscription payments fall into three stages:

1. Preliminary project stage (evaluating alternatives, selecting a vendor): expensed.
2. Initial implementation stage (all ancillary charges needed to place the asset into service): capitalized as part of the subscription asset, or expensed when no subscription asset is recognized, as with a short-term SBITA.
3. Operation and additional implementation stage: expensed unless specific capitalization criteria are met.

Training costs are expensed in every stage. Short-term SBITAs (maximum possible term of 12 months or less, including extension options) are expensed.

Audit procedures

Completeness is the main risk. Search accounts payable and the vendor master for recurring payments for space, equipment and software; read board minutes and contract registers; and ask IT for a list of cloud applications. Recompute the present values with the GASB 87 calculator and the GASB 96 calculator. More procedures are in the GASB 87 audit guide and the GASB 96 audit guide.

A copier lease and a permitting software subscription