Policy References:

GASB Statement 87 – Leases (GASBS 87)

GASB Statement 96 – Subscription-Based Information Technology Arrangements (GASBS 96)

LEASES – OVERVIEW

GASBS 87 defines a lease as a contract (e.g., an agreement between two or more parties that creates enforceable rights and obligations) that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

The following are not reportable as leases under GASBS 87:

• Leases of intangible assets, including rights to explore or exploit natural resources; licensing contracts for items such as video recordings, patents, and copyrights; and licensing contracts for computer software. 
• Leases of biological assets, including timber, living plants, and living animals.
• Leases of inventory.
• Contracts that meet the definition of a service concession arrangement.
• Leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
• Supply contracts, such as purchase power agreements.

SUBSCRIPTION-BASED INFROMATION TECHNOLOGY ARRANGEMENTS - OVERVIEW

GASBS 96 defines a Subscription-Based Information Technology Arrangement (SBITA) as a contract (e.g., an agreement between two or more parties that creates enforceable rights and obligations) that conveys control of the right to use another entity’s information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets) as specified in the contract for a period of time in an exchange or exchange-like transaction.

SBITAs frequently include cloud computing arrangements such as Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). One of the key distinguishing features of these agreements is that the government is only able to access/use the software for a finite period of time. 

The following are not reportable as SBITAs under GASBS 96:

• Contracts that convey control of the right to use another party’s combination of IT software and tangible capital assets that meets the definition of a lease in Statement No. 87, Leases, in which the software component is insignificant when compared to the cost of the underlying tangible capital asset.
• Governments that provide the right to use their IT software and associated tangible capital assets to other entities through SBITAs.
• Contracts that meet the definition of a public-private and public-public partnership.
• Licensing arrangements that provide a perpetual license. 
• Agreements that have a maximum possible term of 12 months or less (short-term SBITAs).

Short-term Leases and SBITAs

Short-term lease and SBITA agreements are exempt from being reported under GASBS 87 and GASBS 96. An agreement is considered short-term if, at the commencement of the subscription/lease term, it has a maximum possible term under the contract of 12 months (or less). 

Maximum possible term is the period of time, distinguished in months, that an agreement could be active, including all possible renewal periods, regardless of the likelihood of executing any of the renewal clauses. An agreement with a maximum possible term of greater than 12 months is a lease or SBITA under GASBS 87 and GASBS 96, respectively, and is subject to evaluation as reportable. An agreement with a maximum possible term of 12 months or less is a reporting exception under GASBS 87 or GASBS 96 and is treated as a short-term operating agreement with an expenditure or revenue recorded in the current reporting period.

Materiality 

Materiality is set based on an agreement’s Annual Exchange of Value (AEV). This computed value represents the dollar value anticipated to be exchanged between the parties to the lease or lease-like agreement during a 12-month period.  Some agreements will fall below OSC’s reporting materiality threshold.

AEV Calculation

The Annual Exchange of Value (AEV) is computed using the sum of all payments required under the agreement for the use of the asset (payments not directly related to the right to use the asset such as taxes, management services, and utilities for leases and maintenance services for SBITAs, should not be included in this calculation) divided by the number of months the government has the right to use the asset during the period the agreement is reasonably certain to be in effect (including the payment value and number of months for all agreement renewal periods reasonably certain to be executed and/or excluding payments and months for termination clauses reasonably certain to be executed) multiplied by 12 months.

AEV = (∑ reasonably certain right to use payments/reasonably certain term in months¹) * 12

For SBITAs, the AEV calculation should also consider any capitalizable implementation costs included in the agreement budget. 

AEV = ((∑ reasonably certain right to use payments + budgeted capitalizable implementation costs)/reasonably certain term in months¹) * 12

¹Reasonably Certain Term

The period, distinguished in months, that an agreement is reasonably expected to be in effect including all possible renewal periods reasonably expected to be executed and/or termination clauses reasonably expected to be utilized. The lease/subscription term agreement provides the noncancelable right to use the underlying asset while the reasonably certain term also includes the time frame of the parties reasonably certain actions based on all relevant factors. 

REPORTING PROCESS

In order to calculate a liability and a corresponding intangible asset that represents the right-to-use leased asset or SBITA asset, OSC collects certain required information from State agencies. Additional data, including information about any variable payments, is also collected to fulfill note disclosure requirements.

LEASE REPORTING 

Any agreement, formal or informal, entered into by a State agency subject to financial reporting and disclosure under GASBS 87 will fall into one of the following three scenarios.

Scenario 1 (OGS-managed Real Property Lease)

• The agreement is for a lease of real estate, and
• The State agency is the lessee in the agreement, and
• The lease agreement is managed for the State by the Office of General Services (OGS) and OGS manages the agreement within the Statewide Financial System (SFS) and OGS will act on behalf of the reporting entity in meeting the reporting requirements of GASBS 87, and
• The agreement results in an annual exchange of value more than $1.

Scenario 2 (Non-OGS-managed Payable Lease)

• The agreement is for the lease of an asset, and
• The State agency is the lessee in the agreement, and
• The agreement is managed by the State agency, and
• The agreement results in an annual exchange of value of $100,000 or greater.

Scenario 3 (Revenue Lease)

• The agreement is for the lease of an asset, and
• The State agency is the lessor in the agreement, and
• The agreement results in an annual exchange of value of $100,000 or greater.

Leases meeting the definition of scenario 1 will be maintained in the (SFS) and included in the State’s financial reporting. No further action beyond the determination of the reasonably certain term for OGS-managed Real Estate Leases is required of OGS or the lease tenant agency to meet GASBS 87 requirements.

Leases meeting the definition of scenarios 2 or 3 will be reported directly by agencies to OSC. OSC will be using a lease reporting software known as LeaseController^TM  for this purpose. State agencies will complete and submit the appropriate reporting template to OSC.

Quarterly Reporting of New Leases

For each quarter (April-June, July-September, October-December, January-March), State agencies must complete a new lease upload tool detailing all reportable leases entered into during that quarterly period.

Leases which allow use of the underlying asset as of the start date of the agreement should be reported in the quarterly reporting during which the start date falls. In those situations, where the underlying asset is being used prior to the start date of the agreement: a) if the asset was being used under a short term agreement such as day-to-day, month-to-month, holdover or evergreen lease agreement, the lease should be reported to OSC in the quarter of the lease agreement start date; b) if the asset is being used pending the approval of the lease agreement and the use of the asset will be paid for under the lease agreement, the lease should be reported in the quarter of the start of the use of the asset. The contract number of any new agreements with variable payments should also be reported to OSC quarterly.

All reporting templates must be submitted to OSC no later than 30 days after the end of the quarter.

Quarterly Reporting of Lease Modifications/Changes

Periodically, and at a minimum, annually, OSC will provide each agency a list of lease contracts existing within LeaseController. It is the responsibility of each agency to review this list and notify OSC of any modifications (e.g. changes to lease terms, unreported leases, etc) by completing the Modification Reporting Template on the GASBS 87 web page.

All reporting templates must be submitted to OSC no later than 30 days after the end of the quarter.

SBITA REPORTING

OSC will be using the same LeaseController^TM reporting software used for Leases to report SBITAs. State agencies should use the appropriate reporting template for reporting to OSC.

Quarterly Reporting of New Agreements and Modifications/Changes

On a quarterly basis (April-June, July-September, October-December, January-March), OSC collects information about new agreements that commenced in the prior three months and material changes or modifications to previously reported agreements. The contract number of any new agreements with variable payments should also be reported to OSC quarterly. All responses must be submitted to OSC no later than 30 days after the end of the quarter.

Agreements that were previously reported do not have to be reported again unless there have been modifications to the agreement. If an agency has no modifications to previously reported agreements, and no new agreements that commenced in the prior three months, a nothing to report reply will fulfil reporting requirements for that quarter.

Reporting SBITA Implementation Costs

Some SBITAs may have additional costs required to place the asset into service. If these charges meet certain criteria (are capitalizable), they should be added to the value of the SBITA asset and amortized over the subscription term.

Activities can be grouped into stages of implementation. Each stage receives its own accounting treatment—only costs associated with certain stages will be reported to OSC.

Please note that the nature of the activity is more important than the timing of when an activity occurs. For example, costs related to training, even if it occurs during the initial implementation stage, should be expensed as incurred. 

Any incurred capitalizable implementation costs should be reported on the reporting template. If the asset is not placed into service by the end of the reporting period, any capitalizable implementation costs incurred during the year should be reported to OSC at year-end.

Annual Variable Payment Cost Request

Some agreements contain payments that are variable. Payments under such contracts could fluctuate each payment period based on factors such as future performance of the government, usage of the underlying asset, or in the case of SBITAs, the number of users. At year-end, OSC will send an additional request to agencies to collect amounts spent on certain variable payments (those not measured in the SBITA or lease liability) during the fiscal year.

Measurement of Lease and SBITA Amounts

The information collected on the reporting templates is used to record a lease or subscription liability and a corresponding intangible right-to-use lease or SBITA asset, respectively.

Leases – As a Lessee

The lease liability is measured at the present value of lease payments, payable during the remainder of the lease term. The lease asset is initially measured as the initial amount of the lease liability, plus lease payments made to the lessor at or before the commencement of the subscription term, less lease incentives, plus any initial direct costs. 

Leases – As a Lessor

The lease receivable is measured at the present value of lease payments expected to be received during the lease term. A corresponding deferred inflow of resources, measured as the initial lease liability adjusted for any lease payments received prior to the commencement of the lease term, is recorded as well.

SBITA

The SBITA liability is measured at the present value of SBITA payments, payable during the remainder of the subscription term. The SBITA asset is measured at the SBITA liability plus payments made at the commencement of the subscription term and capitalizable initial implementation costs.

Guide to Financial Operations

REV. 12/26/2023