The corporate world requires specific rules and regulations to help organizations carry out their businesses fairly and transparently. It is the sole purpose of accounting standards, as they ensure financial reporting is carried out visibly. Hence, as an accountant, while you may know some of the older accounting standards, you need to acquaint yourself with recent changes. The core of every business is asset management.
You exchange resources to establish a cash flow and maintain profit. But, you cannot simply give away your assets without documenting them; this is where standards like GASB 87 come into play. This principle teaches you the method and procedure of documenting your financial reports. So what is this new standard, and how do you use it? Here is what you need to know:
What Is GASB 87?
GASB is the Government Accounting Standards Board, a private and non-governmental organization that creates accounting reporting standards. One of the principles introduced is GASB 87. According to this accounting standard, all leases, except a few, must be recorded as capital assets on the balance sheet, while you must remove nonfinancial assets. The GASB 87 was issued in June 2017 but went into effect on June 15, 2021. This accounting standard also clarifies that leases and acquisitions over 12 months of payment should be recorded as liabilities and right-of-use assets.
Additionally, GASB 87 requires you to mention assets from the previous years that are still active on your balance sheet. So this chronologically organizes all your capital assets and assets you have lent out as liabilities. If you feel overwhelmed by this information, don’t be; this article will have GASB 87 explained to you in simple words.
- What Is The Difference Between GASB 87 and Older GASB?
GASB 87 and the older accounting principles differ according to the lease classification. GASB 87 unifies all your leases, eliminating the difference between operating and capital leases. So as long as you have an asset you can capitalize on, it will become a financial lease. Previously, you had to distinguish between capital and operating leases putting them in different categories on the balance sheet.
- What Is Considered A Lease In GASB 87?
GASB 87 defines a lease as a contract clearly showing who gets to use your nonfinancial assets and for how long. Likewise, if you lend out a resource, who receives the right to use it, and how much will you get in exchange for this transaction? Hence, nonfinancial assets include land, buildings, equipment, and supply contracts. You are allowed to use or lend these assets and charge the organization that plans on using them with interest.
- What Impact Does This New Accounting Principle Have On Businesses?
Businesses will be severely impacted by the GASB 87 since it changes how they record their financial transactions and balances their books. By implementing this new standard, you will need to register the lease according to the new standards, which helps you record it on the balance sheet. Since this is a digitized process, you must use robust accounting software and change all operating leases to capital or financial if the prescribed terms go beyond 12 months. Any agreement that is under 12 months will not go on your financial report.
- What Are The Requirements for GASB 87?
According to the GASB 87 leases, a lessee must recognize a lease liability and the right to use a leased asset in their lease agreement. The lease liability is the present value of all the future payments made over the prescribed period. The right to use assets gets accounted for as the initial amount of the lease liability and if the lessee has to make additional payments to the agreement before or after the deal goes into action. On the other hand, a lessor who will use this asset has to recognize a lease receivable under the GASB 87. The lease receivable gets calculated the same way a lease liability gets measured.
How Do You Workout the GASB 87?
As you draft an agreement and hand out an asset, you must document this process according to the GASB 87 principles. Details are as follows:
- Calculate the initial lease liability. The initial lease liability is the present value of all the future payments the lessee must make over the prescribed term of the lease.
- Calculate The Initial Asset Value. The asset value measures the initial lease liability and anything the lessee has to pay over the term. It doesn’t include the lease incentives received from the lessor.
- Record This Entry Under GASB 87. Once you have a lease agreement in motion, you must post this under GASB 87 in your books. You will mention all your operating and capitalizing finances under one heading and liability under the other.
- Continue Recording Relevant Journal Entries. The right-of-use asset will be recorded as the outflow of resources over the prescribed term. It depicts that the asset you give away has a specific value that depreciates over time. So by making subsequent journal entries, you’re reducing the lease liability over time and increasing the interest rate on the leased asset. To calculate the interest expense, you need to use the interest rate and multiply it by the ending liability balance of the previous period.
Final Thoughts
When it comes to the corporate sector, you need to run your business according to the accounting standards set out by the regulating bodies. One of the core aspects that you need to maintain according to the latest accounting standards is managing your assets. When you lend out any nonfinancial asset to a third party, such as your property, you must document it.
You need to go through the GASB 87 accounting principle, which states that all the assets you lend out, whether financial or operational, are under one heading and lease liabilities are under the other. Over time you will increase the interest expense and decrease the liability, which reflects asset depreciation. This process ensures transparency and informs auditors how your assets get managed as a single entity.
