GASB 87 Lease Accounting: Asset Valuation Implications

Understanding how new lease accounting standards affect fixed asset reporting and the critical role of accurate asset valuations for compliance. GASB 87 has fundamentally changed how government entities account for leases, with significant implications for asset valuation and financial reporting.

Understanding GASB 87

GASB Statement No. 87, Leases, establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. This standard requires recognition of certain lease assets and liabilities that previously were classified as operating leases and not reported on the balance sheet.

For government entities, this represents a significant change in financial reporting, requiring comprehensive identification of lease arrangements and accurate valuation of lease assets and liabilities.

Asset Valuation Requirements

Lease Asset Recognition

Under GASB 87, lessees must recognize a lease liability and an intangible right-to-use lease asset. The lease asset is initially measured at the amount of the initial measurement of the lease liability, plus any payments made to the lessor at or before the commencement of the lease term, less any lease incentives received.

Determining Fair Value

Accurate asset valuations are critical for several GASB 87 requirements:

• Determining whether a contract contains a lease
• Measuring lease assets and liabilities at inception
• Assessing lease modifications and remeasurements
• Evaluating impairment of right-to-use assets
• Supporting residual value guarantees

Implementation Challenges

Lease Identification

Many government entities have discovered that lease arrangements are embedded in contracts not previously identified as leases. Comprehensive contract review is essential to identify all arrangements that meet the GASB 87 definition of a lease.

Data Collection

GASB 87 requires detailed information about each lease, including payment terms, renewal options, and underlying asset characteristics. Many entities lack centralized lease management systems, making data collection challenging.

Valuation Expertise

Determining fair values for diverse asset categories—from real estate to specialized equipment—requires valuation expertise that may not exist within government finance departments.

The Role of Professional Valuations

Professional asset valuations support GASB 87 compliance in several ways:

• Lease Classification: Fair value assessments help determine whether arrangements should be classified as leases
• Initial Measurement: Accurate valuations support proper initial recognition of lease assets and liabilities
• Impairment Testing: Ongoing valuations support required impairment assessments
• Audit Support: Independent valuations provide documentation supporting financial statement assertions
• Disclosure Requirements: Valuations support required disclosures about leased assets

Best Practices for Compliance

Looking Ahead

As government entities gain experience with GASB 87, the importance of accurate asset valuations will only increase. Auditors are paying close attention to lease accounting, and entities with robust valuation processes will be better positioned to demonstrate compliance and avoid audit findings.