GASB 87 implementation: lease accounting for government entities

What is GASB 87?

GASB 87 (Leases) is the governmental accounting standard that requires state and local governments to recognize lease assets and lease liabilities on the balance sheet. Issued by the Governmental Accounting Standards Board in June 2017, it replaced the previous lease guidance under GASB Statement No. 62.

The fundamental change: governments must now recognize a right-to-use lease asset (an intangible asset) and a corresponding lease liability for virtually all leases exceeding 12 months. This applies to both lessees and lessors in the governmental environment.

Unlike ASC 842, GASB 87 uses a single model for all leases. There is no distinction between operating leases and finance leases. Every qualifying lease follows the same measurement and recognition approach.

Who must comply

GASB 87 applies to all state and local government entities that report under governmental accounting standards:

• State governments and their agencies
• Counties, cities, and municipalities
• School districts and education service agencies
• Public universities and community colleges
• Public utilities and transit authorities
• Special districts (water, sewer, fire, parks)
• Component units of reporting entities

The standard became effective for fiscal years beginning after June 15, 2021. Most governments with fiscal years ending June 30 adopted GASB 87 for the year ending June 30, 2022.

GASB 87 vs ASC 842: key differences

Both GASB 87 and ASC 842 require balance sheet recognition of leases. But the standards differ in several important ways:

The single-model approach simplifies classification but creates different expense patterns than ASC 842 operating leases. Organizations subject to both standards (such as government entities with component units reporting under GAAP) need software that supports parallel calculations.

The five implementation phases

A successful GASB 87 implementation follows five phases. The first two — lease inventory and data extraction — are typically the most time-consuming, especially for large government entities with leases spread across dozens of departments and component units.

Phase 1: Build a complete lease inventory

Government entities typically have leases across many departments: real estate, vehicles, equipment, copiers, postage machines, modular buildings, communication towers, and more. The first step is identifying every contract that meets the GASB 87 definition of a lease.

What qualifies as a lease under GASB 87

A lease is a contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction.

What GASB 87 excludes

• Leases of intangible assets (covered by GASB 96)
• Leases of biological assets (such as timber)
• Service concession arrangements (GASB 60)
• Leases financed with conduit debt obligations
• Supply contracts (gas, electricity, water)
• Short-term leases with a maximum possible term of 12 months or less

Where government leases hide

Government entities often have hundreds of small equipment leases managed at the department level rather than centrally:

• Public works: heavy equipment, vehicles, road maintenance machinery
• Parks and recreation: sports facilities, concession stands, maintenance equipment
• IT departments: server space, copiers, telecommunications equipment
• Schools: portable classrooms, buses, food service equipment
• Law enforcement: vehicles, communication towers, evidence storage
• Utilities: water treatment equipment, pump stations, infrastructure

Phase 2: Extract lease data from documents

For each lease identified, extract the data points required for GASB 87 measurement:

• Commencement date and maximum possible lease term
• Noncancelable period
• Extension and termination options (with probability assessment)
• Fixed payment amounts and payment frequency
• Escalation provisions (fixed amount, CPI, or percentage)
• Variable payments based on usage or performance
• Residual value guarantees
• Purchase options
• Lease incentives

For government entities with hundreds of leases across dozens of departments, manual extraction is the primary bottleneck. AI-powered extraction reads lease PDFs and extracts every relevant term automatically, compressing months of manual abstraction to days.

Phase 3: Measure lease liabilities and assets

Lease liability

The lease liability is measured at the present value of payments expected to be made during the lease term. This includes:

• Fixed payments
• Variable payments that depend on an index or rate
• Amounts probable of being required under residual value guarantees
• The exercise price of a purchase option, if reasonably certain
• Payments for penalties for terminating the lease
• Any lease incentives receivable from the lessor

Lease asset

The lease asset (an intangible right-to-use asset) is initially measured at the amount of the lease liability plus any payments made at or before commencement, less any lease incentives received, plus any initial direct costs ancillary to placing the asset in service.

Lease Asset = Lease Liability + Prepayments - Lease Incentives + Initial Direct Costs

Subsequent measurement

The lease liability is reduced as payments are made and increased by interest accrued each period. The lease asset is amortized on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset.

Phase 4: Transition entries

GASB 87 requires retroactive restatement for the earliest period presented in the financial statements. For most governments, this means restating two fiscal years. At transition, for each existing lease:

• Measure the lease liability as the present value of remaining lease payments, discounted at the rate as of the beginning of the earliest period restated
• Measure the lease asset equal to the lease liability, adjusted for any prepaid or accrued lease payments
• Adjust beginning net position for the cumulative effect

Phase 5: Ongoing compliance

GASB 87 requires ongoing measurement, reassessment, and disclosure each reporting period:

Monthly/quarterly journal entries

• Record lease asset amortization (straight-line)
• Record interest expense on the lease liability
• Record lease payments (reducing the liability)

Modification accounting

Changes to lease terms, payments, or interest rates require remeasurement of the lease liability and corresponding adjustment of the lease asset. Government lease modifications are common — space expansions, term extensions, rent abatements.

Note disclosures

GASB 87 requires disclosures including:

• General description of leasing arrangements
• Total amounts recognized (lease asset amortization, interest)
• Aggregate future minimum lease payments for each of the five subsequent fiscal years and in five-year increments thereafter
• Principal and interest requirements to maturity
• Commitments under leases before commencement
• Components of any net lease receivable (for lessors)

Choosing the discount rate

GASB 87 prescribes a specific hierarchy for discount rates:

1. Rate implicit in the lease — the rate the lessor charges the lessee. Use this if readily determinable.
2. Estimated incremental borrowing rate — the rate the government would pay to borrow the lease payment amount, on a collateralized basis, over the lease term, in the current economic environment.

Unlike ASC 842, there is no risk-free rate option under GASB 87. Government entities must estimate their incremental borrowing rate, which can be based on recent debt issuances, outstanding bonds, or rates from similar-credit entities.

GASB 96: subscription-based IT arrangements

GASB 96 extends the GASB 87 model to subscription-based information technology arrangements (SBITAs). Effective for fiscal years beginning after June 15, 2022, GASB 96 requires governments to recognize:

• A subscription asset (intangible right-to-use asset for the IT software)
• A corresponding subscription liability (present value of future subscription payments)

Common SBITAs include cloud ERP systems, SaaS applications, hosted email platforms, document management systems, and any IT arrangement where the government does not control the underlying IT infrastructure.

Arvexi supports both GASB 87 and GASB 96 on the same platform, allowing government entities to manage leases and SBITAs from a single source of truth.

Common implementation pitfalls

1. Incomplete inventory across departments

Government entities often manage leases at the department level with no central repository. Public works has equipment leases, IT has copier leases, schools have portable classroom leases — and nobody has a complete picture. A centralized survey across all departments and component units is essential.

2. Confusing GASB 87 with ASC 842

Government entities that also prepare GAAP financial statements (component units, blended units) sometimes apply ASC 842 rules to GASB 87 calculations. The standards differ on classification, lease term probability, and short-term exemption rules.

3. Overlooking the short-term exception threshold

GASB 87's short-term exemption applies only when the maximum possible term is 12 months or less. If a lease has a 6-month term with a 12-month extension option, the maximum possible term is 18 months — and GASB 87 recognition is required.

4. Ignoring GASB 96 SBITAs

Many government entities focused on GASB 87 leases and overlooked GASB 96 for their IT subscriptions. SaaS contracts, cloud hosting, and software subscriptions all require recognition under GASB 96.

5. Using one discount rate for all leases

A single blended rate across all leases is not appropriate. The incremental borrowing rate should reflect the specific term, collateral type, and economic conditions of each lease.

Technology and automation

Government entities managing 100+ leases across multiple departments and component units need dedicated software to handle GASB 87 compliance.

What to look for in government lease accounting software

• GASB 87 + GASB 96 support — the platform should handle both leases and SBITAs under governmental standards
• Multi-standard capability — if your entity also reports under GAAP, the platform should support ASC 842 alongside GASB 87 from the same data
• AI-powered extraction — upload lease documents and get structured data back. Document Intelligence eliminates the data entry bottleneck
• Fund-level and government-wide reporting — journal entries formatted for both governmental fund and government-wide statements
• Note disclosure automation — maturity schedules, principal and interest breakdowns, and required disclosures generated automatically
• Audit trail — every calculation traceable back to the source document

See how Arvexi supports government lease accounting with full GASB 87 and GASB 96 compliance.

Implementation timeline with AI extraction

• Weeks 1-2 — department-wide lease survey. Collect all contracts from public works, IT, schools, parks, utilities, and administration. Upload documents for AI extraction.
• Weeks 3-4 — QA review. Verify extracted terms, assess extension probability, determine discount rates, and classify short-term exemptions.
• Weeks 5-6 — transition calculations. Generate opening balances, restatement entries, and comparative period schedules. Reconcile with existing records.

Six weeks from survey to go-live. Book a demo to see this timeline applied to your entity.