GASB 87 Ultimate Guide

Last Updated on April 17, 2025 by Morgan Beard

GASB 87 represents a transformative shift in government lease accounting, affecting how thousands of public sector organizations report their lease obligations and financial commitments. For accounting professionals and finance leaders in government entities, this standard demands a thorough understanding not just of the requirements, but of their practical application in real-world scenarios — especially when managing operating and capital leases, leasehold improvements, and Information Technology Arrangements.

The Shift in Lease Accounting Standards

The standard aligns accounting and financial reporting practices for governments with other major frameworks like those from the Financial Accounting Standards Board (FASB) while addressing the unique needs of public sector entities. This alignment improves transparency, enables informed decisions, and creates consistent application across different types of organizations while maintaining specific reporting requirements crucial for government transparency.

What is GASB 87?

Definition and Purpose

GASB 87 establishes a single model for lease accounting based on the foundational principle that leases finance the right to use an underlying asset. Unlike operating and capital leases under older rules, this approach treats most leases as financing arrangements rather than simple operating expenses, improving the comprehensive view of a government’s financial position and commitments.

Who Needs to Comply?

The standard applies to all state and local governmental entities, including:

• Public colleges and universities
• Public hospitals and healthcare facilities
• Special purpose governments
• School districts
• Public transportation authorities
• Municipal governments

Core Requirements of GASB 87

How GASB 87 Defines a Lease

Under GASB 87, a lease must meet specific criteria:

• Contract that conveys control of the right to use another entity’s nonfinancial asset
• Specified time period
• Exchange or exchange-like transaction

Control under GASB 87 is defined as “the right to obtain present service capacity and the right to determine the nature and manner of use.”

GASB 87 Scope

GASB 87 defines the scope of leased assets as non-financial assets, such as land, buildings, equipment, and vehicles. Certain non-financial asset-based lease agreements are out of scope, such as:

• Leases of intangible assets
• Leases of biological assets
• Inventory leases
• Supply contracts
• Service concession arrangements
• Other certain agreement types, such as assets financed with outstanding conduit debt

Additionally, all short-term leases with a maximum noncancelable term of 12 months or less, regardless of whether all noncancelable terms (e.g., renewals) are expected to be exercised, can be excluded from recognition on the statement of financial position. This simplifies the handling of ancillary charges and variable payments.

Real-World Example: Municipal Office Space Lease

Let’s consider a practical example that we’ll use throughout this rest of this guide. You can leverage our Lease Amortization Schedule to follow along.

A city government signs a lease for office space with the following terms:

• Lease term: 2 years
• Monthly Payments: 15,0000
• Incremental borrowing rate: 5%
• Commencement date: January 1, 2025

Recognition and Measurement

Using our municipal office example, here’s how to calculate the initial recognition using our Lease Amortization Schedule.

GASB 87 Impact on Financial Statements

Balance Sheet Impact

• Assets: Addition of Right-of-Use Asset ($343,333.09)
• Liabilities: Recognition of Lease Liability ($343,333.09)

The resulting journal entry on the possession date would be:

DR: Right-of-Use Asset 343,333.09

CR: Lease Liability 343,333.09

If there was prepaid rent credited at this time and the amount would be added to the Right-of-Use Asset amount.

Income Statement Impact

Subsequent to the lease commencement date, the lease will begin to have an income statement impact. The lease asset should be amortized, and reported as an outflow of resources, in a “systematic and rational manner” over the lesser of the lease term or useful life of the underlying asset. Subsequent entries will also decrease the lease liability and record interest expense. The lessee will record interest expense and amortize the lease liability as the difference between the cash payment and the calculated interest expense.

Going back to our example, the income statement impact for 2025 would be the following:

Interest Expense charged for the year would be $12,615.31

Amortization Expense charged for the year would be $171,666.55:

The total income statement impact for 2025 would be $184,281.86. The monthly journal entries would be, using February 2025 as an example:

At Cash Payment:

DR: Interest Expense $1,311.25

Dr: Lease Liability $13,631,95

CR: Cash $15,000

To Record Monthly Amortization Expense:

Dr:  Right-of-Use Asset Amortization Expense $14,305.55

Cr:  Right-of-Use Asset Accumulated Amortization $14,305.55

To Record Reclassification Between Short Term and Long Term Liabilities

Based on your company’s determination of how to calculate short term and long term liabilities, you will also need to reclass the long term balance into short term at the end of each month. 

Conclusion

GASB 87 introduces a significant change to government lease accounting, demanding updated systems, policies, and journal entries for accurate financial reporting and compliance. It ensures a comprehensive view of future performance obligations and improves transparency of a government’s financial commitments.

Additional Resources

For implementation support:

• GASB Implementation Guides
• Government Finance Officers Association
• Occupier Lease Amortization Schedule
• Lease Accounting Chart of Accounts

Note: This blog post was last updated February 2025. For the most current guidance, please refer to the GASB website.