Connecting state and local government leaders
COMMENTARY | A new financial reporting requirement for states, localities and higher ed will require a heavy undertaking to efficiently reach compliance.
A new Governmental Accounting Standards Board’s standard (GASB 87) that requires state and local governments and public higher education institutions to report lease information on their financial statements is in effect for fiscal years starting after Dec. 15, 2019. The historic move to mandate that the reporting of capital and operating leases for equipment, real estate, information technology infrastructure and more on state and local governments’ balance sheets is a complex, labor-intensive undertaking that some publicly traded companies in the U.S. have struggled with for years.
State and local governments, along with public higher education institutions—working under tight budgets and resource constraints—may find the new required reporting changes difficult as the detailed lease data necessary to comply with this standard has not been captured or tracked in the past. A June 2019 online poll of state and local government, and public higher education employees found that 28.1% felt unprepared to comply with lease accounting standards. Of those respondents, 40.7% said implementing the recording of financial statements in accordance with the standard will be “difficult” for their organizations.
The complications of compliance stem from the difficulty of collecting and analyzing lease information. Reasons for this include the age of the actual lease agreement (many are only available in hard copy), the lack of a central repository for leases and hyper-technical lease agreement language that is hard to interpret, to name a few.
Leaders who are working to become compliant with the new standard and build efficient processes to support lease accounting implementation efforts should ask themselves three questions as they move forward.
Is our talent ready for lease accounting?
Implementing—or achieving compliance with—lease accounting demands considerable change management. Ripple effects will span across finance and accounting, information technology, procurement and legal departments. Because of these far reaching organizational impacts, determining who will lead which aspects of the implementation process is key. A chief priority for the core leadership teams working on lease accounting implementation should be developing tailored communications and trainings for all staff on the new processes required by GASB 87. It is also wise to counsel staff not only on the internal effects but on how to communicate financial and operational impacts of lease accounting to non-government stakeholders, like lenders and analysts.
While some organizations may have well-trained, highly-skilled professionals on staff to implement and manage lease accounting implementation, we recognize not all do. So, for those with limited personnel resources, establishing a support structure to answer questions and provide clarity on lease accounting issues can also be helpful. For example, some state and local governments have established multidisciplinary lease implementation project management teams and even created and hired new positions specifically dedicated to lease accounting.
Do we have the correct protocols in place?
Because lease accounting implementation will drive deep organizational change, it’s important to discern which internal controls already in place align with the new standard and which need to be updated and implemented. For example, new controls need to be established to make sure lease contracts are captured in appropriate systems so accounting and finance professionals have access to that lease data to ensure accurate lease accounting calculations and financial reporting.
Another critical protocol to reconcile with the new standard is management judgment, in which the reporting entity justifies their decision-making choices for meeting requirements. State and local governments and higher education institutions will want to consider their justifications when they engage and communicate with auditors and lenders on how they came to determine their protocols. For example, key management judgments could be decisions on which leases are inconsequential to the financial statements, which lease options are reasonably certain to be exercised and decisions on the interest rate used in calculations.
How can IT help improve the collection of lease data?
Leaders should determine if existing data collection systems are aligned with accounting policies. Compliance demands more, deeper data than most organizations have historically tracked on leases and it is critical for lease data to be easily obtained and reliable. Early time spent capturing, centralizing and checking the accuracy of all appropriate lease data required for calculations can limit time spent fixing calculation errors or financial misstatements later.
Many organizations are testing lease accounting software and systems to see if they can help with their unique requirements for lease data centralization and for tracking agreements as they age or are amended. We’ve seen more than one state test such systems end-to-end, often tapping other government software user groups to see how they overcame IT-related lease accounting implementation challenges.
Some U.S. public companies also have leveraged technology solutions to help manage lease accounting implementation. The public sector institutions that now have to implement these requirements stand to benefit from these previous lessons learned.
Many organizations expect implementation efforts to comply with GASB 87 to take considerable time and effort. No matter the status of your government’s lease accounting compliance work, continue sprinting toward the “finish line” to ensure you are not only in compliance but are efficiently leveraging your resources to do so.
Jennifer Ahn is a Deloitte Risk & Financial Advisory partner with Deloitte & Touche LLP. Blake Rodgers is an Audit & Assurance partner with Deloitte & Touche LLP. Both serve U.S. state and local government clients, as well as other entities.