The Government Accounting Standards Board (GASB) issued Statement No. 87, Leases. This replaces the previous lease accounting methodology and establishes a single model for lease accounting based on the foundational principle that leases are a financing of the right to use (RTU) an underlying asset. Following are highlights from GASB Statement No. 87 – Leases (ca.gov).
Essentially, the company is required to do a present value calculation of the operating lease based on the expected future cash flows, discounted at the company’s borrowing rate. This present value amount is the amount that is capitalized and then amortized and depreciated over the life of the lease.
With TValue software, determining this present value is a simple calculation. By doing a present value calculation, you can determine the value of the lease asset to capitalize on your balance sheet and have the supporting amortization schedule to allocate the principal and interest.
Let’s walk through an example in TValue.
We will use Monthly as our Compounding Period and a Nominal Annual Rate, our incremental borrowing rate, of 6%. We will enter a Lease Event on the first cash flow line with the Amount as Unknown. The second line will be a Payment in advance, starting the same Date as the Lease, with an Amount of $1,300 for a Period of 59 months. The cash flows are inclusive of regular payments/rents and any residuals/balloons. The third line will be a Residual with an Amount of $15,000. This would be adjusted one month so the payment is on the 60th month. This would aggregate to $91,700 in cash flows. The present value or the capitalized value of the operating lease would be $77,731.
Although the calculations in TValue can often be straightforward, there can be numerous factors to consider. The Accounting Standards Codification 842, Leases is 511 pages and covers too many issues to discuss in this blog.
TimeValue Software has more information on lease calculations at https://www.timevalue.com/tvalue-leasing and has two recorded webinars on basic and advanced lease pricing that you can view from our Archives at https://www.timevalue.com/webinars.
If you have any questions using TValue software, please give our Support Team a call at 800-426-4741 or shoot us an email at support@TimeValue.com.