Be a business leader, not a number cruncher

Be a business leader, not a number cruncher

GASB 87: At its least, its Lessee, Lessor and More What we will cover Discuss an overview of the single model for recording leases (capitalization) Discuss lessor considerations Analyze the importance of creating a lease inventory Identify issues related to defining leases, including separate components Analyze early auditor considerations 2 WHY IS THIS A BIG DEAL???

GOVERNMENTS ARE LESSEES Global Change (including FASB / International) 89,000 governments+ may be effected, including Tribal Nations Existing GAAP largely from the 1970s (if not before) GASB-62 adopted mostly FASB-13 (GASB Cod Sec. L20) GOVERNMENTS ARE LESSORS

Airports Stadiums Casinos / entertainment venues Ports / marinas Utilities Institutions of Higher Education Governments may be both Lessees and Lessors! Existing gaap is something ingrained Capital leases have the famous 4 that if one are hit, its capitalized akin to financed

purchases The present value of the minimum lease payments is 90% (or more) of fair value at inception Lease term is 75% (or more) of asset economic life There is a bargain purchase option often $1 Ownership transfers at conclusion cost is sometimes embedded in liability All others are operating Disclosure: Capital leases - minimum payments Operating leases, expenses / expenditures Noncancelable leases disclose minimum payments Problem many operating leases in government are really noncancelable current accounting does not meet GAAP definition of a liability (present obligation with little or no discretion to avoid) Existing GAAP for leases GASB Codification Section L20 - Leases NCGA Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments

GASB Statement 13, Accounting for Operating Leases with Scheduled Rent Increases GASB Statement 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements 5 GASBs lease project overview 2011 added to research agenda 2013 added to current agenda 2014 preliminary views issued 2015 field test / public hearings 2016 exposure draft issued / public hearing 2017 final standard released in June 2020 Statement 87 effective 12/31/2020 6 Leases No classification of leases into operating/capital or other categories Underlying assumption that leases are financings Exceptions (lessors and lessees) Short-term leases Leases that transfer ownership and do not contain termination

options Exceptions for lessors Leases of assets that are investments Certain regulated leases (e.g., airport-airline agreements) Definition of a Lease A contract that conveys control of the right to use another entitys nonfinancial asset (the underlying asset) as specified by the contract for a period of time in an exchange or exchangelike transaction. 9 Definition of a lease Control requires both of the following: 1. the right to obtain the present service capacity from use of the

underlying asset, and 2. the right to determine the nature and manner of use of the underlying asset Control applied to the right-to-use lease asset (a capital asset) specified in the contract Control criteria NOT limited to contracts that convey substantially all of the present service capacity from use of the underlying asset Right-to-use lease assets include rights to use underlying assets for portions of time, such as certain days each week or certain hours each day Leases scope exclusions Intangible assets (mineral rights, patents, software, copyrights) Except for the sublease of an intangible right-to-use asset Biological assets (including timber, living plants, and living animals) Inventory Service concession arrangements (See GASB Statement 60) Assets financed with outstanding conduit debt unless both the asset and conduit debt are reported by lessor Supply contracts (such as typical power purchase agreements, which do not convey control of the right to use the underlying power generating facility)

Contracts that transfer ownership exception If a contract Transfers ownership of the underlying asset to the lessee by the end of the contract AND Does not contain termination options (other than fiscal funding or cancellation clauses) This type of contract is not a lease and should be reported as a financed purchase These contracts are not subject to the measurement or financial reporting requirements of the Leases statement 12 Contracts that transfer ownership exception At the end of such term LESSEE shall acquire legal title to the Vehicles and terminate this Lease with respect thereto by paying to LESSOR all amounts that are due and unpaid hereunder and the remaining principal balance with respect to such Vehicles as shown on the Schedule relating thereto. Lease term when does it start/end for financial reporting purposes? Starts with the noncancelable period, plus periods covered by lessees and lessors options to:

Extend the lease, if the option is reasonably certain of being exercised Terminate the lease, if the option is reasonably certain of NOT being exercised Excludes cancelable periods Periods for which lessee and lessor each have the option to terminate or both parties have to agree to extend Rolling month-to-month leases Fiscal funding/cancelation clauses ignored unless reasonably certain of being exercised Lease term - example Ste p 1 Determine the noncancelable period Contract provides the government

control of the right-to-use a bus for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate the lease Lease term example (cont.) Ste p 1 Determine the noncancelable period 2 years Ste

p 2 Assess the options Contract provides the government control of the right-to-use a bus for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate the lease Lease term example (cont.) Ste p 1

Ste p 2 Determine the noncancelable period 2 years Assess the options Is it reasonably certain the termination option will be exercised by the government? Contract provides the government control of the right-to-use a bus for 3 years. After three years, there is an option to extend for 2

years After two years, the government can terminate the lease 17 Lease term example (cont.) Ste p 1 Ste p 2 Determine the noncancelable period 2 years Assess the options Is it reasonably certain the termination option will be exercised

by the government? NO Is it reasonably certain the option to extend will be exercised by the government? Contract provides the government control of the right-to-use a bus for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate the lease 18 Lease Term example (cont.) Ste

p 1 Ste p 2 Determine the noncancelable period 2 years Assess the options Is it reasonably certain the termination option will be exercised by the government? NO Is it reasonably certain the option to extend will be exercised by the government? YES Contract provides the government control of the

right-to-use a bus for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate the lease 19 Lease term example (cont.) Lease Term - Example Noncancelable period Years 1 2 + Period covered by option to terminate when it is NOT certain to be exercised

Year 3 + Period covered by Option to Extend when it is reasonably certain to be exercised Year 4 5 Total Lease Term 5 Years Contract provides the government control of the right-to-use a bus for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate

the lease 20 Reassessment of lease term Reassess the lease term only if one or more of the following occurs: Lessee or lessor elects to exercise an option even though originally determined that the lessee or lessor would not exercise that option Lessee or lessor elects to not exercise an option even though previously determined that the lessee or lessor would exercise that option

An event specified in the contract that requires an extension or termination of the lease takes place. 2 1 Short-term lease exception A short-term lease is one that, at the beginning of the lease, has a maximum possible term under the contract, including any options to extend, of 12 months or less Practicality exception for short-term leases For a lease that is cancelable either by the lessee or lessor, such as month-to-month or year-to-year leases, the maximum possible term is the noncancelable period including

any notice period No Balance Sheet Impact No disclosures required Flows statements reflect the activity based on contract provision 22 Contracts with multiple components Separate contracts into lease and nonlease components or multiple lease components Allocate consideration to multiple underlying assets if: Consider Contract Combinations when reviewing Multiple

Components 23 Contracts with multiple components Allocation process: No Policy provision in Standard 24 LESSEE Recognition & Measurement Click to edit Master text styles Second level Third level Fourth level Fifth level Initial & Subsequent reporting Lease liability does

not include lease payments that are dependent on lessees performance or usage of underlying asset Lease liability payments discounted using the rate the lessor charges the lessee (may be implicit) or, if that rate cannot be readily determined, the lessees incremental borrowing rate If the underlying asset becomes impaired, apply capital asset impairment 26 LESSEE bus Lease Example

The government has a long-standing process of leasing its buses. On January 1, 2021, the government enters into a contract for five buses. The contract states the term is 5 years, with monthly payments of $2,000 due every 1st of the month. Lessor provided the borrowing rate of 6%. After three years, the government may cancel the contract. After the fifth year, the purchase price for each bus is $12,000. The government regularly leases buses and has historically utilized the buses for the full term of the contract and have never terminated early. The contract does not provide the lessor an option to terminate. At the date of the contract, the government does not have any intent to terminate early. At the end of the lease, the government intends to returns the buses, there is no transfer of ownership provision.

Does this meet the definition of a lease? 27 LESSEE bus lease example (cont.) The government has a long-standing process of leasing its buses. On January 1, 2021, the government enters into a contract for five buses. The contract states the term is 5 years, with monthly payments of $2,000 due every 1st of the month. Lessor provided the borrowing rate of 6%. After three years, the government may cancel the contract. After the fifth year, the purchase price for each bus is $12,000.

The government regularly leases buses and has historically utilized the buses for the full term of the contract and have never terminated early. The contract does not provide the lessor an option to terminate. At the date of the contract, the government does not have any intent to terminate early. At the end of the lease, the government intends to returns the buses, there is no transfer of ownership provision. Does this meet the definition of a lease? YES 28 LESSEE bus lease example (cont.) Identifying the Lease Term Lessee options Year 1 Year 2 Year 3 Year 4 Year 5 Terminate Extend

N/A N/A N/A N/A N/A N/A Reasonably certain will not exercise N/A Reasonably certain will not exercise N/A Lessor options Terminate Extend N/A N/A N/A N/A N/A N/A N/A N/A

N/A N/A What is the term of the lease? Should the purchase price be considered in the lease liability? 29 LESSEE bus lease example (cont.) Identifying the Lease Term Lessee options Year 1 Year 2 Year 3 Year 4 Year 5 Terminate Extend N/A N/A N/A N/A N/A

N/A Reasonably certain will not exercise N/A Reasonably certain will not exercise N/A Lessor options Terminate Extend N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A What is the term of the lease? 5 YEARS

Should the purchase price be considered in the lease liability? NO 30 LESSEE bus lease example (cont.) Assumptions for Lease Liability calculation: Buses are delivered on January 1, 2021, date of 1st payment. Payment schedule 5 years, assuming a 6% interest rate. Purchase price, not certain of being exercised (exclude) Present value of $2,000 monthly payments for 5 years (60 months): Rate = (6% per year / 12 months to get rate per month) Nper (number of payments) = 60 Pmt (monthly payment) = 2,000 FV (future value) = 0 Type = 1 if payments are made at beginning of period, 0 if payments are made at end of period =PV(6%/12,60,-2000,0,0) 31 LESSEE bus lease example (cont.) Assumptions for Lease Liability calculation: Buses are delivered on January 1, 2021, date of 1st payment. Payment schedule 5 years, assuming a 6% interest rate. Purchase price, not certain of being exercised (exclude)

Present value of $2,000 monthly payments for 5 years (60 months): Rate = (6% per year / 12 months to get rate per month) Nper (number of payments) = 60 Pmt (monthly payment) = 2,000 FV (future value) = 0 Type = 1 if payments are made at beginning of period, 0 if payments are made at end of period Present Value = $103,45 1 =PV(6%/12,60,-2000,0,0) 32 LESSEE bus lease example (cont.) 2021 2022 2023 2024 2025 Annualized Payment Schedule Principal Interest Total Payment

18,290 5,710 24,000 19,419 4,581 24,000 20,616 3,384 24,000 21,888 2,112 24,000 23,238 762 24,000 103,451 16,549 120,000 Year 1 Year 2 Year 3 Year 4 Year 5

Amortization Amortization Amortization Amortization Amortization 20,690 20,690 20,690 20,690 20,691 103,451 33 LESSEE bus lease example (cont.) Governmental Fund - Initial Journal Entry Debit Capital outlay Other financing sources - lease proceeds To record capital expenditure and related proceeds from lease of buses 103,451

Entity-wide - Initial Journal Entry Debit Other financing sources - lease proceeds Lease liability due within one year Lease liability due beyond one year Intangible lease asset - vehicles Capital outlay To record intangible asset and related liability from lease of buses 103,451 Credit 103,451 Credit 18,290 85,161 103,451 103,451

34 LESSEE bus lease example (cont.) Enterprise funds - Initial Journal Entry Debit Intangible lease asset - vehicles 103,451 Lease liability due within one year Lease liability due beyond one year Credit 18,290 85,161 35 LESSEE bus lease example (cont.) Governmental Fund - Year 1 Journal Entry

Debit Interest expense 5,710 Lease principal payment expenditure 18,290 Cash To record 12 monthly lease payments for first year Entity-wide - Year 1 Journal Entries Debit Lease liability due within on year Lease principal payment expenditure Amortization expense Accumulated amortization To eliminate fund level activity for first year 18,290 Credit 24,000 Credit

18,290 20,690 20,690 36 LESSEE bus lease example (cont.) Enterprise funds - Year 1 Journal Entry Debit Lease liability due within one year 18,290 Interest expense 5,710 Cash To record 12 monthly lease payments for first year Amortization expense Accumulated amortization To record annual amortization expense Credit 24,000

20,690 20,690 37 LESSEE bus lease example (cont.) Enterprise funds and Entity-wide Year 1 Journal Entry Lease liability due beyond one year Lease liability due within one year Debit Credit 19,419 19,419 To adjust due within one year liability Consider need for accrued interest based on payment schedule.

38 LESSEE bus lease example (cont.) Governmental Fund - Year 2 Journal Entry Interest expense Lease principal payment expenditure Cash To record 12 monthly lease payments for second year Entity-wide - Year 2 Journal Entries Lease liability due within one year Lease principal payment expenditure Amortization expense Accumulated amortization To eliminate fund level activity for second year Debit Credit 4,581 19,419 24,000 Debit

Credit 19,419 19,419 20,690 20,690 39 LESSEE bus lease example (cont.) Enterprise funds - Year 2 Journal Entry Debit Interest expense Lease liability due within one year Cash To record 12 monthly lease payments for second year 4,581 19,419 Amortization expense

Accumulated amortization To record annual amortization expense 20,690 Credit 24,000 20,690 40 LESSEE bus lease example (cont.) Enterprise funds and Entity-wide Year 2 Journal Entry Lease liability due beyond one year Lease liability due within one year Debit Credit 20,616 20,616

To adjust due within one year liability Consider need for accrued interest based on payment schedule. 41 LESSEE bus lease example (cont.) Three years remaining on bus lease End of year 2 balances Lease liability due within one year Lease liability due beyond one year Total $ 20,616 45,126 65,742 Vehicle - leased asset $ 103,451 Accumulated amortization - Vehicle - leased asset (41,380) Vehicle NBV

62,071 42 LESSEEdisclosures a. b. c. d. A general description of leasing arrangements, including: 1. Basis, terms, and conditions, on which variable lease payments are determined 2. Existence, terms, and conditions of residual value guarantees provided by the lessee Total amount of assets recorded under leases, and the related accumulated amortization, disclosed separately from other capital assets Lease assets disaggregated by major classes of underlying assets, disclosed separately from other capital assets Variable lease payments recognized during the period but not previously included in the lease liability

43 LESSEEdisclosures e. f. g. h. Other payments recognized during the period but not previously included in the lease liability (such as residual value guarantees or penalties) A maturity analysis of all future lease payments Payments for each of the first five years Payments in five-year increments thereafter Show principal and interest separately Lease commitments, other than short-term leases, for which the lease term has not yet begun Components of any net impairment loss (gross impairment loss less change in lease liability) 44 LESSEE bus lease disclosure example general description disclosure

The government is leasing five buses for five years, starting January 1, 2021, with monthly payments of $2,000 with an interest rate of 6%. LESSEE bus lease disclosure example (cont.) Capital Assets Year 2 Capital assets not being depreciated Land Total Capital Assets not being depreciated Capital assets being depreciated / amortized Building Equipment Leased Building (Intangible asset) Leased Vehicles (Intangible asset) Total capital assets being depreciated / amortized Less: Accumulated depreciation for Building Equipment Less: Accumulated amortization for Leased building Leased vehicles

Total depreciation and amortization Net capital assets being depreciated and amortized Total, net of accumulated depreciation Beginning Balance $ 1,000,000 1,000,000 Additions $ Deletions - $ - Ending Balance $1,000,000 1,000,000

5,000,000 400,000 500,000 103,451 500,000 36,000 100,000 - 10,000 - 5,500,000 426,000 600,000 103,451 6,003,451 636,000 10,000

6,629,451 3,300,000 340,800 110,000 28,400 10,000 20,000 20,690 3,681,490 20,000 20,690 179,090 10,000 3,410,000 359,200 40,000 41,380 3,850,580

2,321,961 $ 3,321,961 456,910 $ 456,910 $ - 2,778,871 - $3,778,871 Impact on Net Investment in Capital Assets 46

LESSEE bus lease disclosure example (cont.) A maturity analysis of all future lease payments Payments for each of the first five years Payments in five-year increments thereafter Show principal and interest separately Future Lease Payment Maturity Schedule Principal Interest Total Payment 2023 $ 20,616 $ 3,384 $ 24,000 2024 21,888 2,112 24,000 2025 23,238 762 24,000 2026 2027

2028 - 2032 $ 65,742 $ 6,258 $ 72,000 Combine with building lease payment schedule for financial statement presentatio n 47 LESSEE bus lease example, expanded Multiple contract components What if the lease agreement requires the government

to pay an additional $500 per quarter for maintenance, including oil change, tune ups, etc. for each bus? Should that be included in the lease liability? Does $500 per quarter for five buses seem reasonable? Is it identifiable in the contract? 48 LESSEE bus lease example, expanded (cont.) Multiple contract components What if the lease agreement requires the government to pay an additional $500 per quarter for maintenance, including oil change, tune ups, etc. for each bus?

Should that be included in the lease liability? NO Does $500 per quarter for five buses seem reasonable? YES Is it identifiable in the contract? YES 49 LESSEE activity bus example, expanded (cont.) Multiple contract components Governmental Fund - Year 1 Journal Entry Debit Interest expense

Lease principal payment expenditure Maintenance expense Cash To record 12 monthly lease payments for first year 5,710 18,290 2,000 Entity-wide - Year 1 Journal Entries Debit Lease liability Lease principal payment expenditure Amortization expense Accumulated amortization To eliminate fund level activity for first year 18,290 Credit 26,000

Credit 18,290 20,690 20,690 50 LESSEE activity bus example, expanded (cont.) Multiple contract components Enterprise funds - Year 1 Journal Entry Debit Lease liability Interest expense Maintenance fees Cash To record 12 monthly lease payments for first year 18,290 5,710 2,000

Credit 26,000 51 LESSEE bus lease example, expanded (cont.) Additional payment factors in contract What if the lease agreement requires the government to pay $50 per month, per bus for mileage, plus $1 dollar per mile for every mile over 500 miles each month. What should be included in the lease liability? Is a piece of the contract fixed in substance? Is a piece of the contract excluded from the lease liability? 52 LESSEE bus lease example, expanded (cont.) Additional payment factors in contract

Monthly payment = $2,000 Additional monthly fixed payment for mileage = $50 Monthly variable payment for mileage = $1/ per mile for every mile over 500 miles each month. What additional payments should be included in lease liability? Payments that are fixed in substance are included in the liability Is a piece of the contract fixed in substance? Yes, the monthly charge of $50 should be included Is a piece of the contract excluded from the lease liability? Yes, the mileage fee is not based on an index or rate, it is based on the lessees usage of the underlying asset. 53 LESSEE bus lease example, expanded (cont.) Monthly Fixed in Substance Monthly payment Variable payment 2021 2022 2023 2024

2025 $2,000 $50 Variable 0 Total $2,050 $1/ mile over 500 per bus Annualized Payment Schedule Principal Interest Total Payment 18,748 5,852 24,600 19,904 4,696 24,600 21,132

3,468 24,600 22,435 2,165 24,600 23,819 781 24,600 106,038 16,962 123,000 54 LESSEE bus lease example, expanded (cont.) Additional payment factors in contract In the first month, the cumulative amount of mileage over 500 per bus was 750 miles Governmental Fund - Year 1 Journal Entry Debit Interest expense Lease principal payment expenditure

Mileage expenditure Cash To record 12 monthly lease payments for first year and mileage expenditure 5,852 18,748 750 Credit 25,350 55 LESSEE bus lease example, expanded (cont.) Additional payment factors in contract In the first month, the cumulative amount of mileage over 500 per bus was 750 miles Enterprise funds - Year 1 Journal Entry Debit Lease liability

18,748 Interest expense 5,852 Mileage expense 750 Cash To record 12 monthly lease payments for first year Credit 25,350 56 LESSEE bus lease example, expanded (cont.) Lease Termination For LESSEES What if in year 4, the government gave notice that they would be terminating the lease in year 4 after the year 4 payments were made? 2021 2022 2023 2024

2025 Annualized Payment Schedule Principal Interest Total Payment 18,290 5,710 24,000 19,419 4,581 24,000 20,616 3,384 24,000 21,888 2,112 24,000 23,238 762 24,000 103,451 16,549 120,000 Back to the

original Bus Lease example 57 Lease modifications For LESSEES Remeasure the lease liability on the effective date of modification Assess the need for an updated discount rate Adjust the right-of-use asset by the difference between the modified liability and the liability immediately before the modification If asset reduced to $0, any additional reduction is reported as a gain 58 LESSEE bus lease example, expanded (cont.) Lease Termination For LESSEES For partial/full lease terminations (other than

purchases), lessees reduce/remove the lease asset and obligation Recognize the difference as a gain or loss Entity-wide - Year 4 Journal Entries Debit Lease liability Intangible lease asset - vehicles Gain on termination of lease 23,238 Credit 20,691 2,547 To record the termination of the lease in Year 4 59 LESSOR Recognition & Measurement

Click to edit Master text styles Second level Third level Fourth level Fifth level Initial & Subsequent reporting Do not derecognize the underlying asset and do not recognize a residual asset Depreciate underlying asset as normal, unless required to be returned in its

original or enhanced 61 LESSOR - exceptions Two main transactions do not apply the general lessor recognition and measurement guidance (but still required to provide certain disclosures) Leases of tangible assets that are investments No lease receivable reported for leased investment assets because investments are reported at fair value Certain regulated leases (e.g., airport-airline agreements) Airport-airline agreements have features that dont operate like financings 62 LESSOR - disclosures Lease activities may be grouped for disclosure purposes

a. A general description of leasing arrangements The basis, terms, and conditions on which variable lease payments not included in the lease receivable are determined b. The total amount of inflows recognized in the reporting period related to leases, if not displayed on face of financials LESSOR - disclosures c. The lease inflows related to variable lease payments and other payments not previously included in the lease receivable Include inflows related to residual value guarantees and termination penalties d. If lease payments secure lessors debt: The existence, terms, and conditions of

options by the lessee to terminate a lease or abate lease payments Similar disclosures required for certain regulated leases (airport-airline agreements) 64 LESSOR - disclosures If governments principal ongoing operations consist of leasing to other entities, Disclose maturity analysis of all future lease payments included in lease receivable Payments for each of the first five years Payments in five-year increments thereafter Show principal and interest separately 65 Lessor office space example

Lease between a Primary Government (State X) and a discretely presented component unit (DPCU) (governmental in stand-alone financial statements) in which both have 6/30 fiscal year ends. State Xs current rental agreement has expired and is electing to relocate to a new larger space offered by the DPCU. As part of the agreement the DPCU has to install entry security access at each entrance within the first month of the agreement. The cost of the installation is $2,500.00 The agreement begins on 7/01/2021. The term is for one year with an option to extend each year for the next four years by the lessee. With prior agreements, State X has elected the options to extend and current indications are that State X will exercise the options for future agreements. 66 Lessor office space example (cont.) The agreement calls for a monthly payment due

on the 1st of each month for an amount of $1,962 The agreement does not provide a stated interest rate. The DPCU, during the implementation of GASB Statement No. 72, determined the building and space being leased was a capital asset at that time. 67 LESSOR office space example (cont.) the Lease term Identifying Year 1 Year 2 Year 3 Year 4 Year 5 What Lessee options

Terminate Extend Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A Lessor options Terminate Extend N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Requires evaluation of both parties when there

are lessee/lessor options. is the term of the lease? 68 LESSOR office space example (cont.) the Lease term Identifying Lessee options Year 1 Year 2 Year 3 Year 4 Year 5 Terminate Extend Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A Reasonably certain will N/A

Lessor options Terminate Extend N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A What is the term of the lease? Five Years 69 LESSOR office space example (cont.) The rental begins on July 1, 2021 and that is the date the first payment is due. Payment schedule, assumes a 4% interest rate. Present value of $1,962 monthly payments for 5 years (60

months): Rate = (4% per year / 12 months to get rate per month) Nper (number of payments) = 60 Pmt (monthly payment) = 1,962 FV (future value) = 0 Type = 1 if payments are made at beginning of period, 0 if payments are made at end of period Present Value = $106,890 70 LESSOR office space example Amortization table Measurement of the lease receivable based on the fixed payments outlined in the agreement 2021 2022 2023 2024 2025 Annualized Payment Schedule Principal Interest Total Payment 19,995 3,549

23,544 20,440 3,104 23,544 21,273 2,271 23,544 22,140 1,404 23,544 23,042 106,890 502 10,830 23,544 117,720 71 LESSOR office space example (cont.) Initial Journal Entry Debit Credit Lease receivable

Deferred inflow of resources To record receivable and related deferred inflow (7/1) 106,890 Initial Journal Entry Expenditure/expense Cash To record direct cost associated with the agreement (Year 1 July) Debit 2,500 106,890 Credit 2,500 72 LESSOR office space example (cont.) Year 1 Journal Entry

Debit Credit Cash 23,544 Interest Income 3,549 Lease Receivable 19,995 To record receipt of 12 monthly lease payments for first year (systematic/rational manner) Year 1 Journal Entry Debit Deferred inflow of resources 19,995 Interest Receivable 290 Lease Revenue Interest Revenue To record systematic recognition of revenue; and accrued interest (6/30) Credit

19,995 290 Lessor continues reporting the tangible asset and the recognition of depreciation. 73 LESSOR - remeasurement Remeasure the lease receivable and update the discount rate when one or more of the following occur and are expected to significantly affect the receivable amount: There is a change in lease term There is a

change in the rate the lessor charges the lessee A contingency is resolved making variable payments fixed If remeasured, also remeasure for changes in an index/rate used to determine variable lease payments If the discount rate is updated, the receivable should be adjusted using the revised rate The deferred inflow of

resources generally adjusted by the same amount as 74 the lease Lease modifications For LESSORS Remeasure the lease receivable on the effective date of modification Assess the need for an updated discount rate Adjust the deferred inflow of resources by the difference between the modified receivable and the receivable immediately before the modification However, to the extent any change relates to payments for the current period, recognize in current period flows statement (for example, revenue) If change results from refunding related debt and passing savings on to the lessee, see remeasurement guidance in paragraph 76 75 Lease terminations For LESSORS

For partial/full lease terminations (other than sales), lessors reduce/remove the lease receivable and related deferred inflow of resources Recognize the difference as a gain or loss If the lessor sells the underlying asset, derecognize underlying asset Include in the calculation of any gain or loss 76 LESSOR office space example, expanded During June 2022; State X, as a result of a shortfall in revenue, required state agencies to relocate any staff located outside of a state owned facility; provided space is available for relocation. The DPCU unit has been notified by State X that the state agency located in its office space will relocate for the next fiscal year and is exercising their option to terminate effective

7/1/2022. Based on the termination option agreement, since advance notice was provided, no payment will be required at 7/1. 77 LESSOR Office space example, expanded (cont.) Year 2 Journal Entry Deferred inflow of resources Lease Receivable To record termination of lease Debit Credit 86,895 86,895 78 Considerations for Implementation Materiality considerations

Asset value and liability value What if the underlying assets do not meet the governments capitalization threshold? IG question on this 7.9.8 directing governments to capitalize the collective amount if material in total Draft IG - Leases question Identifying the rate charged From the lessee perspective From the lessor perspective 81 Effective date & transition Effective for periods beginning after December 15, 2019 Earlier application encouraged Transition Apply retroactively Restate if practicable, cumulative effect if not Leases recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation (hindsight)

Lessors should not restate the assets underlying their existing sales-type or direct financing leases Any residual assets for those leases would become the carrying values of the underlying assets 82 Implementation ideas 83 Other accounting and reporting provisions Lease Incentives Subleases Sale-Leasebacks Lease-Leasebacks IntraEntity Leases Leases Between Related Parties LEASES Implementation Guide EXPOSURE DRAFT TOPICS Comments Due April 30 - 80 Questions, 3 - Illustrations

and Applicability Lease term Short-term leases Contracts that transfer ownership Lessee recognition and measurement (other than short-term leases and ownership transfers) Notes lessees Lessor recognition and measurement (other than short-term leases and ownership transfers) Notes lessors Incentives Multiple components Combinations Modifications and terminations Sale leaseback transactions Lease leaseback transactions Intra-entity leases Transition and effective date Scope Questions? 86

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