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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

Short-Term Contracts

Both GASB 87 and GASB 96 have exemptions for short-term contracts.

A short-term contract has a possible maximum term of 12 months at the start of the contract term. This includes any renewal or extension options regardless of the probability of exercising any of the options.

State agencies do not recognize a right to use liability or asset for a short-term contract. Instead, contract payments are recognized as outflows of resources when incurred.

A lessor does not recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term for short-term leases.

According to Implementation Guide No. 2023-1, Implementation Guidance Update—2023:

Question 4.1:

A lease contract states that it will remain in effect for three years unless terminated before then. The contract allows the lessee to terminate the lease for any reason with 60 days’ notice. The contract allows the lessor to terminate the lease with 60 days’ notice only if the lessee defaults on payments. Is this a short-term lease?

Answer:

No. The lessee has an unconditional right to terminate and, therefore, has an option to terminate. The lessor does not have an unconditional right to terminate because the lessor is allowed to terminate the lease only on the condition that the lessee defaults on payments and, therefore, does not have an option to terminate. Accordingly, there are no periods for which both the lessee and the lessor have an option to terminate and, therefore, no cancellable periods to exclude from the maximum possible term, which is three years.

Question 4.2:

A lease has a noncancellable period of 36 months, and the lessee has an option to extend the lease for an additional 12 months. At the commencement of the lease, it is not reasonably certain that the lessee will exercise that option. At the end of the noncancellable period, the lessee exercises the option to extend the lease. Does exercising the option to extend result in a change to the maximum possible term?

Answer:

No. In accordance with GASB 87, paragraph 16, the maximum possible term at the commencement of the lease includes all options to extend, regardless of their probability of being exercised. At the commencement of the lease, the maximum possible term is 48 months, whereas the lease term is 36 months. When the lessee exercises the option to extend, the lease term is reassessed to be 12 months. However, the maximum possible term remains 48 months when the option is exercised.