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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

Leases — Recognitions and Measurements
Remeasurements

According to GASB 87, the lessee will remeasure the lease liability if the changes individually or in the aggregate are expected to significantly affect the amount of the lease liability. A remeasurement will occur if there is a:

  • Change in the lease term.
  • Likelihood of a residual value guarantee being paid has changed from reasonably certain to not reasonably certain, or vice versa.
  • Likelihood of a purchase option being exercised has changed from reasonably certain to not reasonably certain, or vice versa.
    –or–
  • Contingency that is resolved in such a way that those payments now meet the criteria for measuring the lease liability. (For example: an event occurs that causes variable payments that were contingent on the performance or use of the underlying asset to become fixed payments for the remainder of the lease term).

According to GASB 87, the lessor remeasures the lease receivable if the changes individually or in the aggregate are expected to significantly affect the amount of the lease receivable. A remeasurement occurs if there is a:

  • Change in the lease term.
  • Change in the interest rate the lessor charges the lessee.
  • Contingency resolution is such that those payments now meet the criteria for measuring the lease receivable. (For example, an event occurs that results in variable payments that were contingent on the performance or use of the underlying asset becoming fixed payments for the remainder of the lease term.)

The deferred inflow of resources generally are adjusted by the same amount as any change resulting from the remeasurement of the lease receivable.

A lease liability is NOT required to be remeasured solely for:

  • A change in an index or rate used to determine variable payments. If the rate or index increases, the additional amount will be recognized as an outflow for the period.
  • A change in the lessee’s incremental borrowing rate (nor is the discount rate required to be reassessed).
    • If the interest rate increases, the additional amount will be recognized as an outflow of the period.
    • If the interest rate decreases, the difference will be recognized as a reduction of the outflows of the period.

A lease receivable is NOT required to be remeasured solely for a change in an index or rate used to determine variable payments.

On GASB’s Pronouncements page (in the Implementation Guide category), in GASB’s Implementation Guide No. 2019-3, Leases, under the Lease Receivable section, question 4.48 states:

  • Q—In addition to fixed payments, a lease contract includes provisions for variable payments based on future performance and for a residual value guarantee that did not initially meet the criteria for inclusion in the lease receivable. If those variable payments and the residual value guarantee subsequently meet the criteria for recognition, should the amounts be added to the existing lease receivable or be considered separate receivables?
  • A—When the variable payments and residual value guarantee meet the criteria for recognition, the amounts should be considered separate receivables, and an inflow of resources should be recognized in the period to which those payments relate.

According to GASB 87, paragraphs 45 and 46, variable payments based on future performance and residual value guarantees that are not fixed in substance should not be included in the initial measurement of the lease receivable. Remeasurement of the lease receivable is not required when those payments meet the criteria for recognition.