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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Universities

Multiple Components (Combinations) Contracts

Under both GASB 87 and GASB 96, contracts that are entered into at (or near) the same time with the same party must be considered part of the same contract if the:

  • Contracts are negotiated as a package with a single objective.
    –OR–
  • Consideration paid on one contract depends on the price or performance of the other contract.

Leases (GASB 87)

According to GASB 87, paragraphs 63-68, lease contracts may contain contract components that have both a lease component (such as the right to use a building) and a nonlease component (such as maintenance services for the building), therefore, the agency must account for both the lease and nonlease components as separate contracts, unless the nonlease component is insignificant.

For contracts that include multiple underlying assets, each asset is accounted for as a separate lease component if it has a different lease term or belongs to a different major class of underlying assets. The total contract price is allocated to each component based on observable standalone prices when available. If standalone prices are not readily available, the agency uses reasonable estimates.

To allocate the contract price for:

  • Separate components — lessees and lessors must allocate a price to each component based on observable standalone prices, if available and reasonable.
  • Individual components without prices — both lessees and lessors must use best estimates to allocate contract prices, using reasonable and supportable methods.
  • Contracts with multiple components — Total price must be allocated to each identified component. Each component must be accounted for separately based on its allocated price.

Agencies must use professional judgment while maximizing observable information and consistently apply allocation methods.

According to Implementation Guide No. 2021–1, Implementation Guidance Update—2021:

Question 4.11:

An agency leases office space and is one of several tenants in the building. In addition to fixed payments, the agency is required to make payments to reimburse the lessor for a pro rata share of the lessors taxes and insurance. The additional monthly payment amounts are stated in the lease based on the lessor’s estimate of taxes and insurance at the beginning of each year of the lease term. Annually, the lessor provides a reimbursement or requests an additional payment from the agency to account for the difference between the actual and estimated pro rata share of taxes and insurance. Should the additional monthly payments be included in the measurement of the lease liability?

Answer:

No. If a contract specifies that a lessee pays for a share of the lessor’s taxes and insurance, whether estimated or actual, those payments are considered nonlease components of the contract, which must be accounted for separately from lease components. Therefore, those payments are not lease payments and must not be included in the measurement of the lease liability. Instead, those payments must be recognized as outflows of resources (for example, expense) in the periods in which the obligation for those payments is incurred.

SBITAs (GASB 96)

According to GASB 96, an agency may enter contracts that contain multiple components, such as a contract that contains:

  • Both a subscription component, which includes the right to use underlying subscription component, and a nonsubscription component.
    –OR–
  • Multiple underlying subscription components.

Examples of nonsubscription components include separate perpetual licensing arrangements, maintenance and other service elements related to the subscription assets. When a contract includes multiple underlying subscription assets or both subscription and nonsubscription components, the agency must identify and account for each subscription component separately.

To allocate the contract price for:

  • Separate subscription components — the agency must use the prices for the individual components based on observable standalone prices if available and reasonable.
  • Individual subscription components without prices — the agency must use best estimates to allocate contract prices, using reasonable and supportable methods.
  • Contracts with multiple components — Total price must be allocated to each identified component. Each component must be accounted for separately based on its allocated price.

Agencies must use professional judgment while maximizing observable information and consistently apply allocation methods.