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GASB 87: Breaking Down Implementation for Airports
In June 2017, GASB issued GASB Statement No. 87, Leases, which provides a new framework for accounting for leases under the principle that leases are financings. Lessees will recognize an intangible asset and a corresponding liability while lessors will recognize a lease receivable and related deferred inflow of resources. The goal for this standard was to:
- Increase comparability and transparency amount entities
- Significantly reduce off-balance-sheet risk
- Reflect true substance of government’s leasing transactions
This standard will have a significant impact on airports in the year of implementation as well as future years given the number of leases that are entered into each year. Airports should prepare accordingly and consider some of the following items as they prepare for implementation.
What Defines a Lease?
A lease is considered a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. The founding principle of this standard is that all leases are financings. For additional information on the specific principles of GASB 87, please see our article “GASB 87: Leases September 2020 Update.”
Regulated Leases – Scope Exception
For airports, there is one important exception to remember when determining the scope of leases that need to be included in your population.
Paragraph 42 of GASB 87 provides for disclosure only changes to certain leases subject to external laws, regulations, or legal rulings meeting all of the following requirements:
- Lease rates cannot exceed a reasonable amount, with reasonableness being subject to determination by an external regulator.
- Lease rates should be similar for lessees that are similarly situated.
- The lessor cannot deny potential lessees the right to enter into leases if facilities are available, provided the lessee’s use of the facilities complies with generally applicable use restrictions.
Most aeronautical agreements that airports have will likely fall into this exception and be exempt from the many provisions of GASB 87. The Federal Aviation Administration provides clarification on what distinguishes aeronautical use from non-aeronautical use within its Rates and Charges Policy. Aeronautical use of an airport is considered to be any activity that involves, makes possible, is required for safety of, or is otherwise directly related to, the operation of aircraft. The following potential aeronautical agreements should be reviewed to determine if they are applicable under GASB 87:
- Air carrier agreements related directly to movement of passengers, baggage, mail, and cargo at the airport
- Agreements for facilities that are directly and substantially related to the movement of passengers and baggage (such as ticket counters, baggage handling facilities, and people movers)
- Agreements for facilities directly and substantially related to the movement of mail and cargo
- Agreements for aircraft storage (such as hangars and tie-down areas)
- Aircraft maintenance services, flight training, crop dusting, FBO agreements, etc.
While scoping out aeronautical agreements eliminates a number of airport leases that could be applicable under GASB 87, there are still a significant number of other leases that airports do need to consider such as rental car facilities/operations, corporate headquarter offices, ground handlers, concessionaires, land/ground leases, parking agreements, etc.
Short-term leases also are allowed to be exempt from GASB 87 adoption. A short-term lease is defined as having a maximum possible term of 12 months or less at lease inception including any options to extend, regardless of their probability of being exercised. It inherently excludes all periods cancelable by either the lessee or lessor. For example, rolling month-to-month or year-to-year leases would be considered short term.
For short-term leases, no assets or liabilities are required to be recognized and payments are recorded as expenses or revenues based on terms of the contract.
Effective Date & Transition
GASB 87 is effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Transition is retroactive, so for governments like most airports and other standalone business-type activities, the earliest period presented in the financial statements will need to be restated, if practicable. Practical does not mean convenient, and exceptions would be difficult to achieve.
|Earliest Period Presented|
|Year-End||Comparative-Year Presentation||Single-Year Presentation|
|December 31||January 1, 2021 – December 31, 2022||January 1, 2022 – December 31, 2022|
|June 30||July 1, 2020 – June 30, 2022||July 1, 2021 – June 30, 2022|
|September 30||October 1, 2020 – September 30, 2022||October 1, 2021 – September 30, 2022|
It also is important to remember one of the transition provisions that allows you to use the facts and circumstances existing at the date of implementation. For instance, if you are in the fourth year of a 10 year lease, you calculate the lease as if it were a six year lease starting at the date of implementation. You do not need to book the original asset/liability and four years of amortization that occurred prior to the adoption date.
A significant amount of new assets and liabilities will be coming on to the airport’s financials when this standard is adopted. It is important to remember some of the following implications upon adoption and have discussions to address these items before implementation.
- Bond or loan covenants (definitions of lease or debt)
- Financial statement ratios
- Borrowing capacity
- Rating agency impacts
- Implementation time and resources
- Policies, processes, controls, systems, and people
For years after implementation, additional time and resources will still be needed to record annual adjustments and update the lease schedule for any new or amended leases.
The adoption of GASB 87 will be complex and likely will require significant hours to correctly implement for airports. We can help educate your team, provide implementation tools, and assist with analysis and documentation. If you would like assistance in complying with the new lease standard, contract your advisor or submit the Contact Us form below. Visit our Lease Accounting Resource Center to learn more.