On July 10, 2023, the Governmental Accounting Standards Board issued Implementation Guide No. 2023-1, Implementation Guidance Update-2023 (Implementation Guide 2023-1). Implementation Guide 2023-1 contains 10 new questions and one amendment to a previously issued question-and-answers document. All questions within Implementation Guide 2023-1 are effective for fiscal years beginning after June 15, 2023, with earlier application encouraged if the pronouncement addressed by the question and answer has been implemented
Background
The GASB periodically issues implementation guides to provide guidance that clarifies, explains or elaborates on GASB statements. New questions and answers included in implementation guides address issues raised by the GASB’s stakeholders through inquiries posed and issues identified by the GASB in anticipation of questions that will arise during implementation of board pronouncements. Questions and answers in implementation guides (along with GASB technical bulletins and AICPA literature cleared by the GASB) are considered Category B guidance in the hierarchy of generally accepted accounting principles, whereas GASB-issued statements are considered Category A guidance. If the accounting treatment for a transaction or other event is not specified by a pronouncement in Category A, a governmental entity should consider whether the accounting treatment is specified by a source in Category B.
The GASB issued two exposure drafts related to what would ultimately become Implementation Guide 2023- 1. Both exposure drafts received public comment from stakeholders that the GASB considered and used to clarify certain questions and answers.
Topics Covered
Leases
Implementation Guide 2023-1 includes seven questions and answers regarding leases. Questions 4.1 through 4.3 address short-term leases. Question 4.1 clarifies that for periods for which either the lessee and lessor do not have an unconditional right to terminate a lease, there are no cancelable periods to exclude from the maximum possible term of a lease since there are no periods for which both the lessee and the lessor have an option to terminate. This includes periods in which the lessee may terminate the lease, but the lessor may only terminate upon default of the lessee on payments. Question 4.2 reaffirms that the maximum possible term at the commencement of the lease includes all options to extend, regardless of probability of being exercised. Question 4.3 clarifies there are two circumstances in which a lease modification results in a short-term lease: (1) if the lease was a short-term lease before modification and after modification the lease remains 12 months or less, or (2) after modification a resulting separate lease has a maximum possible term of 12 months or less.
Questions 4.4 and 4.5 cover lessee recognition and measurement for leases other than short-term leases and contracts that transfer ownership. Question 4.4 states governments should recognize interest expense over the entire lease term as interest expense represents the amortization of the discount of the lease liability, even in situations where a government is not making payments. Question 4.5 states that the currency in which lease payments are made does not affect whether lease payments are considered fixed, and that increases or decreases in expected U.S. dollar cash flows are considered a foreign currency transaction gain or loss.
Question 4.6 addresses lessor accounting and states that for a business-type activity or enterprise fund whether revenue recognized from the deferred inflow of resources related to a lease is operating revenue or nonoperating revenue depends on (a) the purpose of the lease, (b) the nature of the activity being reported as a business type activity or in an enterprise fund, and (c) the government’s policy defining operating revenue.
Question 5.1 has the distinction of being the sole question and answer in Implementation Guide 2023-1 that is an amendment to a previously issued question and answer. Question 5.1 amends question 4.16 in Implementation Guide 2019-3 and states that factors to consider when determining whether it is reasonably certain that the lessee or lessor will not exercise the option to terminate a lease include significant economic disincentives, such as cancellation penalties. Periods for which it is reasonably certain that a lessee or lessor will not unilaterally terminate a lease should not be excluded from the lease term.
Subscription-Based Information Technology Arrangements (SBITAs)
Implementation Guide 2023-1 contains three questions and answers addressing SBITAs. Question 4.7 clarifies that a licensing arrangement that automatically renews until canceled is not a perpetual license. Rather, the provision is an option to terminate the agreement at each renewal date, as opposed to a purchase in which a government is granted a permanent right to use the vendor’s computer software. Question 4.8 addresses whether the presence of tangible capital assets in combination with IT software impacts the applicability of GASB 96, Subscription-Based Information Technology Arrangements (GASB 96) on cloud computing arrangements. Many common deployment models of cloud computing arrangements contain IT software used in combination with tangible capital assets. Governments should evaluate the substance of the arrangement in accordance with GASB 96 paragraph 6 to determine if the arrangement meets the definition of a SBITA. Question 4.9 covers the determination of a subscription term, and states that the subscription term does not begin until the initial implementation stage is completed.
Accounting Changes and Error Corrections
Implementation Guide 2023-1 has one question and answer related to GASB 100, Accounting Changes and Error Corrections (GASB 100). Question 4.10 addresses whether the closing out of a major fund and movement of remaining resources to another fund constitutes a change to or within the financial reporting entity. The removal of a fund that does not result from a movement of continuing operations does not constitute a change to or within the financial reporting entity in accordance with paragraph 9a of GASB 100. Instead, the movement of remaining resources should be reported as interfund activity.
Implementation Considerations
Questions 4.1-4.9 and 5.1 are effective for fiscal years beginning after June 15, 2023. Earlier application is encouraged if the pronouncement addressed by the question and answer has been implemented. Changes, if any, should be reported as a change in accounting principle in accordance with GASB 100. If questions 4.1-4.9 or 5.1 are implemented prior to GASB 100, any changes adopted at transition should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. If restatement is not practicable, the cumulative effect, if any, should be reported as a restatement of beginning net position, fund balance, or fund net position, as applicable, for the earliest period restated.
Question 4.10 should be applied simultaneously with the requirements of GASB 100, which are effective for accounting changes made in fiscal years beginning after June 15, 2023. If GASB 100 was implemented prior to issuance of Implementation Guide 2023-1, Question 4.10 is effective for fiscal years beginning after June 15, 2023, with earlier application encouraged.
Written by Sam Thompson. Copyright © 2023 BDO USA, P.C. All rights reserved. www.bdo.com