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State and Local Governments: Leases within the Financial Reporting Entity

The effective date for GASB 87, Leases, is fast approaching for state and local governments (effective for fiscal years beginning after June 15, 2021). Financial statements with June 30, 2022 year-ends will be initial adopters. This article focuses on leases within the financial reporting entity and how they are defined and reported in accordance with GASB 87.

The financial reporting entity of a primary government includes its blended and discretely presented component units. Blended component units are treated as funds of the primary government while discretely presented component units are treated as third parties and presented separately from the primary government. A primary government may have leases with blended and/or discretely presented component units.

Blended Component Units

In the primary government’s financial statements, a lease with a blended component unit is eliminated. The primary government would not report a receivable or a deferred inflow and the blended component unit would not report a liability or a right-to-use asset within the primary government’s financial statements. If, however, the blended component unit has separately issued financial statements, the standard would apply, and the blended component unit would report the right-to-use asset and lease liability.

For example, if a City leases a building to a blended component unit within the City’s financial statements, the City will continue to report the building as a capital asset, but would not report a lease receivable or deferred inflow of resources because the leasing transaction is eliminated. See the summary table below.

Table 1: A City Leases a Building to a Blended Component Unit in the City’s Financial Statements.

Table 1- City Leases Blended Component Unit

Discretely Presented Component Units

If the primary government has a lease with a discretely presented component unit, it is treated the same way as if the primary government had a lease with a third party. The lessor would report a lease receivable and a deferred inflow of resources and continues to report the leased asset. The lessee would report a right-to-use asset and a lease liability.

For example, if a City leases a building to a discretely presented component unit, the City will report a lease receivable, a deferred inflow of resources, and will also continue to report the building as a capital asset. The discretely presented component unit will report a right-to-use asset and a lease payable. See the summary table below.

Table 2: A City Leases a Building to a Discretely Presented Component Unit
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Table 2- City Leases Discretely Component Unit

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Source: GFOA Governmental Accounting, Auditing, and Financial Reporting.

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