The Governmental Accounting Standards Board has issued a proposal to establish a single approach for state and local governments to report leases based on the principle that leases are financings of the right to use an underlying asset.
The proposed standard would provide guidance for lease contracts for nonfinancial assets—including vehicles, heavy equipment, and buildings—but exclude grants, donated assets, and leases of intangible assets (such as patents and software licenses).
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Limited exceptions are provided in the draft guidance, including short-term leases of 12 months or less and financed purchases.
A lessee would report the following in its financial statements:
• Amortization expense related to the lease asset (recognizing the asset amount as an expense over the term of the lease)
• Interest expense related to the lease liability, and
• Note disclosures with information about the lease, including a general description of the leasing arrangement.
A lessor also would report the following in its financial statements:
• Lease revenue (and a corresponding reduction in the deferred inflow systematically over the term of the lease)
• Interest revenue related to the receivable, and
• Note disclosures with information about the lease, including a general description of the leasing arrangement.
“This proposal would more closely align the accounting and financial reporting for leases with the substance of these arrangements,” said GASB chairman David A. Vaudt in a statement. “Establishing a single model for reporting governmental leasing agreements should result in greater transparency and usefulness for financial statement users and reduced complexity in application for state and local government preparers and auditors.”
Other issues addressed in the exposure draft include accounting for lease terminations and modifications, sale-leaseback transactions, nonlease components embedded in lease contracts (such as service agreements), and related-party leases.
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