GASB 87 Checklist: Scope, Measurement, and Disclosure

A GASB 87 lease accounting checklist works in five stages: identify every contract that meets the lease definition, collect the term and payment data for each one, measure and record the right-to-use asset and lease liability, keep both moving each reporting period, and disclose the required detail in the notes. The standard requires state and local governments to put virtually all leases longer than 12 months on the balance sheet, replacing the old operating-lease treatment that kept these obligations off the books.¹

Identify Every Contract in Scope

A contract is a lease under GASB 87 if it gives the government the right to use another entity’s nonfinancial asset for a set period in an exchange or exchange-like transaction.¹ Nonfinancial assets are tangible: land, buildings, vehicles, heavy equipment, office space. Two elements have to be present. The government must obtain the benefit of using the asset, and it must decide how the asset is used throughout the agreement.

The control element is where contracts get misclassified. If the vendor can swap out the asset at will or dictates how the government operates it, the arrangement is closer to a service contract. Spend real time on this test rather than assuming every rental agreement qualifies.

Start the inventory at the department level, not just the general ledger. Many governments find that finance does not hold copies of every active agreement because departments sign leases independently. Equipment and building leases are easy to spot. Harder to catch: billboard space, vending machine placements, stadium suites, and copier arrangements tied to specific machines. Any contract where the government controls an identified asset for a defined period needs to be evaluated.

Contracts That Fall Outside GASB 87

Several categories are excluded from the standard even when a contract conveys the right to use an asset:²

Intangible assets, including software licenses, patents, copyrights, motion pictures, and rights to explore for or extract oil, gas, and minerals
Biological assets such as timber, living plants, and living animals
Inventory and supply contracts, including power purchase agreements
Service concession arrangements as defined under GASB Statement No. 60
Leases where the underlying asset is financed with outstanding conduit debt not reported by the lessor

Cloud-hosted software and subscription-based IT arrangements are not GASB 87 leases. They fall under GASB Statement No. 96, which uses a similar framework but applies specifically to IT subscriptions.³ Contracts that transfer legal ownership of the asset by the end of the term are also excluded; those are treated as financed purchases under capital asset guidance.⁴

The Short-Term Exception

A lease with a maximum possible term of 12 months or less, including every extension option regardless of whether the government plans to exercise it, is a short-term lease.¹ Short-term leases skip balance-sheet recognition; payments are recorded as expenses based on the contract’s payment terms. Watch the detail people miss: a one-year lease with a one-year renewal option has a maximum possible term of two years and does not qualify as short-term, even if the government has no intention of renewing.

Gather the Data Before You Calculate

The measurement math is not complicated, but it falls apart fast if the inputs are wrong. For every qualifying contract, pull the following before opening a spreadsheet.

Lease Term

The lease term starts with the non-cancelable period, then adds extension periods if it is reasonably certain the government will exercise them.² Periods covered by a termination option are excluded if the government is reasonably certain it will end the lease early. “Reasonably certain” is a judgment call. Document the reasoning: past practice, economic incentives, penalties for non-renewal. Auditors will ask.

Payments

Collect every fixed payment across the full term. Also include variable payments tied to an index or rate, such as annual rent increases pegged to the Consumer Price Index, and any amounts the government is reasonably certain to owe under residual value guarantees.²

Variable payments based on future performance or usage, such as per-copy charges on a leased copier, are not included in the lease liability. Those get expensed as incurred in the period the obligation arises.² Mixing the two categories of variable payments is one of the most common calculation errors under this standard.

Discount Rate

Use the rate the lessor charges within the lease if you can determine it from the contract. If you cannot, use the government’s own incremental borrowing rate, which is the rate the government would pay to borrow a similar amount over a similar term.¹ Most contracts do not state an explicit rate, so most governments end up using their borrowing rate. The rate on current outstanding debt is a reasonable proxy where a lender cannot provide a stated rate.

Incentives and Initial Direct Costs

Lessor incentives, such as rent-free periods or tenant improvement allowances, reduce the lease liability because they offset amounts the government would otherwise owe.² Incentive payments received at or before commencement also reduce the capitalized lease asset. Costs incurred to negotiate and execute the lease, such as legal fees or payments to a prior tenant to vacate, are added to the lease asset. Have these documented before measurement.

Record the Lease at Commencement

The lease liability equals the present value of all payments expected during the lease term, minus any lease incentives receivable from the lessor.⁵ Apply the discount rate to each future payment to arrive at the total present value.

The intangible right-to-use lease asset starts with the initial lease liability amount, then adds any payments made to the lessor at or before the start date and any initial direct costs incurred to place the lease into service.² Incentive payments received at or before commencement reduce this total.

The typical journal entry debits the lease asset and credits the lease liability. If the government made prepayments, the credit splits between the liability and a reduction to cash or a prepaid account. This single entry is what puts the lease on the balance sheet.

Keep the Numbers Moving Each Period

After commencement, two things happen every period: the liability shrinks and the asset amortizes.

Each payment splits between principal reduction and interest expense. Interest is calculated on the outstanding liability balance using the same discount rate from initial measurement. The remaining payment reduces principal.¹ This works like a standard loan amortization schedule: early payments are interest-heavy, later payments are mostly principal.

The lease asset is amortized in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset.² Straight-line is the most common approach.

When to Remeasure

Initial measurements are not set-and-forget. Remeasure the lease liability when any of these changes occur and would significantly affect the amount:

A change in the lease term, such as an extension being exercised or a termination option triggered that was not previously anticipated
A shift in the likelihood that a residual value guarantee payment will be owed
A shift in the likelihood that a purchase option will be exercised
A change in estimated payment amounts, including escalation clauses producing figures different from those originally projected
A change in the lessor’s interest rate, if it was used as the discount rate
Resolution of a contingency, where variable payments contingent on performance or usage become fixed for the remainder of the term

When the liability is remeasured, the lease asset is adjusted by the same amount. If the adjustment would push the asset below zero, the excess is reported as a gain on the resource flows statement.²

If the Government Is the Lessor

Many governments lease assets to others: land, cell tower sites, building space. The lessor side of the standard requires different entries but follows a parallel logic.

A government lessor recognizes a lease receivable and a deferred inflow of resources at the start of the lease term. The lease receivable is measured at the present value of payments expected to be received. The deferred inflow equals the receivable amount plus any payments received at or before commencement that relate to future periods.¹

The lessor does not remove the underlying asset from the balance sheet. The building or land stays on the books as a capital asset. Over the term, the lessor recognizes interest revenue on the receivable and draws down the deferred inflow as revenue in a systematic and rational manner.¹ The same exceptions that apply to lessees (short-term leases, ownership transfers) apply here, along with additional exceptions for assets held as investments and certain regulated leases.

Report and Disclose

Lease assets and lease liabilities must appear as separate line items on the Statement of Net Position, distinct from other capital assets and other debt.² Lease assets are typically reported as intangible right-to-use assets rather than alongside owned property and equipment.

The notes to the financial statements must include a general description of the leasing arrangements, including the basis for determining variable payments; the total amount of lease assets recognized, grouped by major class of underlying asset, along with related accumulated amortization; and a maturity analysis of the lease liability showing principal and interest for each of the next five years and in five-year increments after that.²

Where Implementations Go Wrong

The accounting is straightforward once the data is clean. Getting clean data is the hard part.

Missing contracts sink projects. A general ledger review alone will not catch every active lease because departments sign agreements independently and copies do not always reach finance. A department-by-department inventory is the only reliable approach.

Non-obvious leases get skipped. Billboard space, vending placements, stadium suites, copier arrangements tied to specific machines — any contract giving the government control over an identified asset for a defined period needs evaluation.

The two types of variable payments get blended. Index-linked or rate-linked payments belong in the liability. Usage- or performance-linked payments do not. Confusing them inflates or deflates the balance.

Materiality gets skipped. After calculating lease asset values, management still needs to assess whether the amounts are material both quantitatively and qualitatively. If they are not, capitalization may not be required. Document that judgment and revisit it as the lease portfolio changes.

Reassessment gets dropped. Every reporting period, check whether any remeasurement trigger has occurred. An exercised extension, a resolved contingency, or a change in expected payments all require an updated calculation.

1
Governmental Accounting Standards Board. Summary of Statement No. 87 – Leases
2
Governmental Accounting Standards Board. Statement No. 87 of the Governmental Accounting Standards Board – Leases
3
Governmental Accounting Standards Board. Summary of Statement No. 96
4
Governmental Accounting Standards Board. Summary of Statement No. 87 – Leases
5
Governmental Accounting Standards Board. Summary of Statement No. 87 – Leases