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GOVERNMENT FUND ACCOUNTING: GASB 87 LEASES WITHIN GASB 34 CONSOLIDATION TO ACFR

by Ben Belk | Mar 7, 2022

1. Fund accounting in brief

2. GASB 87 lease accounting during the year

 * Governmental fund and modified accrual leases
 * Proprietary fund and full accrual leases

3. GASB 87 lease accounting at year-end and GASB 34 consolidation

 * Governmental fund and modified accrual leases
 * Proprietary fund and full accrual leases

4. Summary

5. Related articles


FUND ACCOUNTING IN BRIEF

Government or public-sector organizations receive taxes, grants, and donations
which must be spent on certain things, and sometimes are spent to provide public
goods or services which don’t generate revenue. Government entities do not
function like private-sector businesses, which sell goods and services for a
profit and spend money for the purpose of generating more revenue.

Because of this, government accounting is different from for-profit accrual
accounting. For day-to-day accounting and financial reporting, governments tend
to focus on accounting in terms of funds, which behave like their own unique
accounting entity and serve a specific purpose.

Three types of funds exist:

 * Governmental funds are for activities supported by taxes, grants, or other
   types of regulatory income and use a modified accrual basis of accounting.
 * Proprietary funds capture the business-like activities of a government that
   create their own income, such as lottery ticket sales.
 * Fiduciary funds capture all monies the government serves as a custodian of,
   such as employee benefit plans.

Proprietary and fiduciary funds use the full accrual basis of accounting, like
the private sector.

At the end of the fiscal year when government entities prepare their financial
results, they first present the information at the fund level with a financial
statement for each of the three fund types. The governmental fund type, which is
kept on a modified-accrual basis, must then be converted from the
modified-accrual basis to full accrual accounting and to be presented in tandem
with the proprietary and fiduciary funds in the government-wide statement of net
position and statement of activities.

Below is an example of the table of contents from an Annual Comprehensive
Financial Report (ACFR) highlighting the organization of these different
financial statements.



To learn more about fund accounting and how it ties into GASB 87 Leases, check
out our article “Government Fund Accounting: Types of Funds and Leases under
GASB 87 with Journal Entries”.

The focus of this article is the accounting considerations for leases under GASB
87 and how they become part of the statement of net position and statement of
activities under GASB 34.


GASB 87 LEASE ACCOUNTING DURING THE YEAR

GASB 87 is the new accounting standard for leases which requires public-sector
entities under the jurisdiction of the Governmental Accounting Standards Board
to represent all lessee leases as finance leases and recognize both a lease
liability and a right-to-use asset. We know leases are one entity paying another
for the right to control a certain tangible asset over a specified period.

Therefore public-sector entities logically could have leases recorded to either
the governmental or proprietary fund type, depending on what department or
function they relate. For example, a building lease might be recorded to a
governmental fund because the property serves the whole government, while
vehicles or certain equipment may be specific to a public service such as their
police force. As such, leases can either be accounted for using the full accrual
method in a governmental fund, or the modified accrual method in a proprietary
fund.


GOVERNMENTAL FUND AND MODIFIED ACCRUAL LEASES

Recall from above the governmental fund is the accounting mechanism for
government activities supported by taxes, grants, or other legislative funds,
and is accounted for under the modified accrual basis of accounting.

Modified accrual is a hybrid approach between cash basis accounting and full
accrual accounting. With modified accrual, revenues are recognized like the cash
basis and accounted for when measurable and available. Expenditures are
inherently accounted for under the full accrual basis because they are always
measurable when incurred. To learn more about how GASB 87 leases are initially
recognized within a governmental fund, check out our article “Government Fund
Accounting: Types of Funds and Leases under GASB 87 w/ Journal Entries”.


PROPRIETARY FUND AND FULL ACCRUAL LEASES

Secondly, recall from above the proprietary fund is the fund which handles all
the business-like activities in which a government engages. Accounting for
proprietary fund leases will recognize expenses when incurred, which is the full
accrual basis of accounting. To learn more about how GASB 87 leases are
initially recognized within proprietary funds, check out our article “GASB 87:
Summary and Example of Accounting for a New Lease Arrangement for Lessees”.


GASB 87 LEASE ACCOUNTING AT YEAR-END AND GASB 34 CONSOLIDATION

GASB Statement No. 34 is one of the most significant public-sector accounting
rule changes ever put in place. Going back to 1999, it requires entities under
the GASB jurisdiction to convert their governmental funds to full accrual
accounting to report all fund-level activity together.


GOVERNMENTAL FUND AND MODIFIED ACCRUAL LEASES

Because governmental fund statements use modified accrual accounting, they need
to be converted to full accrual to be consolidated into the government-wide
statements of net position and activities.

The first entry a lessee makes to account for a governmental fund lease is a
debit to expenditure to establish what is essentially the lease asset, and a
matching credit to other financing sources to establish what is essentially the
liability, as illustrated in the example below:



Ongoing payments are made to the lessor as defined by the lease agreement. The
payments are recorded as a credit cash for the amount paid and debit a
combination of debt service expenditure principal and debt service expenditure
interest, as illustrated in the example below:



At the end of the year to convert to full accrual accounting, the total
expenditures recognized for the lease are credited to reduce the balance to zero
with a corresponding debit recorded to establish the GASB 87 lease asset.
Conversely, the total amount of other financing sources are debited to also
reduce that balance to zero and a corresponding credit will establish the GASB
87 lease liability. For a full description of these conversion entries for
modified accrual leases, check out our article “GASB 87 Accrued Interest
Example: Calculating the Liability Amortization”.

FINANCIAL STATEMENT PRESENTATION

So, what is different about governmental fund leases as presented in the
fund-level statements versus the government-wide statements? Since governmental
funds are accounted for during the year with the modified accrual basis of
accounting, they have to be converted to full accrual accounting at the end of
the year to be consolidated with the government’s other funds to create
government-wide statements. Under GASB 34 government organizations must present
three things:

 1. Their fund type financials before conversion
 2. Their consolidated government-wide financial statements
 3. A reconciliation of the conversion of the modified accrual basis financials
    to the full accrual basis.

The reconciliation for the statement of net position shows the conversion of
certain modified accrual accounts such as capital outlays or deferred
inflows/outflows of resources to the appropriate full accrual accounts such as
capital fixed assets or long-term debt. There is a second reconciliation that
shows the conversion of the statement of changes from modified accrual to full
accrual accounting. For example, the total amount of capital outlays are
reported as expenditures when incurred in the modified accrual basis of
accounting, but in the full accrual basis of accounting the cost of those assets
is capitalized and then allocated over an asset’s estimated useful life as
depreciation expense.


PROPRIETARY FUND / FULL ACCRUAL LEASES

Because proprietary funds already use full accrual accounting, their lease
account balances simply need to be combined with the lease account balances of
any other proprietary funds when presented in the government-wide statements of
net position and activities.


SUMMARY

Government entities with leases falling in the scope of GASB 87 will either
account for those leases with full accrual accounting methodology in the
proprietary funds, or the modified accrual accounting methodology within
governmental funds. If capturing the activity within governmental funds,
conversion entries will be necessary at year-end to convert from the modified
accrual basis of accounting to the full accrual basis of accounting required for
government-wide financials. To be transparent with financial statement users
about how this conversion was performed, a reconciliation is also presented
within the government-wide financials.

If your organization is in the process of complying with GASB 87, a software
solution purpose-built for lease accounting, such as LeaseQuery, can help manage
these calculations under the financial reporting requirements under GASB 87 and
GASB 34. LeaseQuery can provide you with both full accrual and modified accrual
journal entries during the year as needed and can provide you with the
conversion entries necessary to adjust from modified accrual to full accrual
basis at the end of the year.


RELATED ARTICLES

 


GOVERNMENT FUND ACCOUNTING: TYPES OF FUNDS AND LEASES UNDER GASB 87 W/ JOURNAL
ENTRIES

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