Introduction to GASB 87
The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, to improve the accounting and financial reporting of lease agreements by state and local governments. This statement provides guidance on the recognition, measurement, and disclosure of lease agreements.
GASB 87 requires lessors to recognize lease receivables and lease assets, and to record journal entries to reflect the lease agreement. This includes recording the initial direct costs, lease receivables, and the interest income earned on the lease.
Lessor Journal Entries
Under GASB 87, lessors are required to record journal entries to reflect the lease agreement. The initial journal entry would include debiting the lease receivable and crediting the cash received from the lessee. Subsequent journal entries would include debiting the interest income and crediting the lease receivable.
The lessor must also consider the lease term, the lease payments, and any options to purchase or renew the lease when recording the journal entries. This ensures that the financial statements accurately reflect the lease agreement and the lessor's rights and obligations.
Lease Classification
GASB 87 requires lessors to classify leases as either Type A or Type B leases. Type A leases are those where the lessor has transferred control of the underlying asset to the lessee, while Type B leases are those where the lessor has not transferred control.
The classification of the lease affects the journal entries recorded by the lessor. For Type A leases, the lessor would record a lease receivable and recognize interest income over the lease term. For Type B leases, the lessor would record a lease asset and recognize lease revenue over the lease term.
Journal Entry Examples
To illustrate the journal entries required under GASB 87, consider a lessor that enters into a five-year lease agreement with a lessee. The lessor would record an initial journal entry to recognize the lease receivable and the cash received from the lessee.
Subsequent journal entries would be recorded to recognize the interest income earned on the lease and to update the lease receivable. For example, the lessor might record a journal entry at the end of each year to recognize the interest income earned and to reduce the lease receivable.
Conclusion
In conclusion, GASB 87 requires lessors to record journal entries to reflect the lease agreement and to recognize the lease receivable and interest income earned on the lease. The classification of the lease as either Type A or Type B affects the journal entries recorded by the lessor.
By following the guidance provided in GASB 87, lessors can ensure compliance with the standard and accurate financial reporting. It is essential for lessors to carefully consider the lease agreement and the journal entries required to reflect the lease, to ensure that the financial statements accurately reflect the lessor's rights and obligations.
Frequently Asked Questions
What is the purpose of GASB 87?
The purpose of GASB 87 is to improve the accounting and financial reporting of lease agreements by state and local governments.
How do lessors classify leases under GASB 87?
Lessor classify leases as either Type A or Type B leases, depending on whether control of the underlying asset has been transferred to the lessee.
What journal entries are required for Type A leases?
For Type A leases, the lessor records a lease receivable and recognizes interest income over the lease term.
How often should lessors record journal entries for leases?
Lessor should record journal entries at the inception of the lease and at the end of each reporting period, to recognize interest income and update the lease receivable.
What is the difference between Type A and Type B leases?
Type A leases are those where the lessor has transferred control of the underlying asset to the lessee, while Type B leases are those where the lessor has not transferred control.
Why is it essential to follow GASB 87?
Following GASB 87 ensures compliance with the standard and accurate financial reporting, which is essential for making informed decisions and maintaining transparency.