(GASB 95: Paragraphs 4, 4c,5 & GASB 87: Paragraph 93): 
4. The requirements of the following Statements and Implementation Guides are effective as indicated:
c. Statement 87 and Implementation Guide 2019-3---fiscal years beginning after June 15, 2021.

5. Earlier application of the provisions in paragraph 4 is encouraged and is permitted to the extent specified in each pronouncement as originally issued.

93. Changes adopted to conform to the provisions of this Statement should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. If restatement for prior periods is not practicable, the cumulative effect, if any, of applying this Statement should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest period restated.

(GASB 96: Paragraphs 62-63):
62. The requirements of this Statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Earlier application is encouraged.

63. Changes adopted to conform to the provisions of this Statement should be applied retroactively by restating financial statements, if practicable, for all prior fiscal years presented. If restatement for prior fiscal years is not practicable, the cumulative effect, if any, of applying this Statement should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest fiscal year restated. In the first fiscal year that this Statement is applied, the notes to financial statements should disclose the nature of the restatement and its effect. Also, the reason for not restating prior fiscal years presented should be disclosed.

(GASB 94: Paragraphs 84-85):
84. The requirements of this Statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Earlier application is encouraged.

85. Changes adopted to conform to the provisions of this Statement should be applied retroactively by restating financial statements, if practicable, for all prior fiscal years presented. If restatement for prior fiscal years is not practicable, the cumulative effect, if any, of applying this Statement should be reported as a restatement of beginning net position for the earliest fiscal year restated. Also, the reason for not restating prior fiscal years presented should be disclosed. In the first fiscal year that this Statement is applied, the notes to financial statements should disclose the nature of the restatement and its effect.

1. Go to Administration/GL Accounts, under the heading Existing Balances under Previous Lease Accounting Guidance add Prepaid Expense GL account (or modify default Prepaid Rent (Asset) GL Account)

2. Go to Add Lease screen to enter your lease or go to My Leases and edit the lease (if the lease was previously added)

3. In Add/Edit Lease, select the tab “Lease Payments,” and go to the section “Existing Balances under Previous Lease Accounting Guidance”

4. Select the Prepaid Expense GL Account from the dropdown and enter the existing balance as a positive value and save your lease:

After completion of the steps above, upon initial application of GASB 87 or GASB 96, the opening journal entry for this lease will remove your existing balance under previous lease accounting guidance with an offset to the Lease Asset:
Dr. Lease Asset (GL#210)                                                         $50,000*
            Cr. Lease Liability (GL#220)                                                               $50,000
Dr. Lease Asset (GL#210)                                                         $3,000*
            Cr. Prepaid Asset (GL#500)                                                                  $3,000         

*In this example, the Lease Asset is calculated to be $50,000 under the new lease accounting guidance.  An additional $3,000 of Lease Asset is recognized in the journal entry to remove the prepaid expense balance under previous lease accounting guidance.

Because the following journal entry does not impact ongoing lease accounting entries, you can book it outside or within LeaseCrunch. 

Remove your existing balances with a journal entry outside of LeaseCrunch:
Dr. Capital Lease Liability (GL#720)                                              $51,000
            Cr. Capital Lease Asset (GL#710)                                                          $48,000
   Cr. Net Position (GL#1000)                                                                  $3,000

Remove your existing balances with a journal entry in LeaseCrunch by following these steps:

1. Go to Administration/GL Accounts, under the heading Existing Balances under Previous Lease Accounting Guidance add Net Position, Capital Asset and Capital Liability GL Accounts

2. Go to Add Lease screen to enter your lease or go to My Leases and edit the lease (if the lease was previously added)

3. In Add/Edit Lease, select the tab “Lease Payments,” and go to the section “Existing Balances under Previous Lease Accounting Guidance”

4. Select each GL Account from the dropdown and enter the existing balance as a positive value and save your lease.

After completion of the steps above, upon initial application, the opening journal entry for this lease will remove your existing balance under previous lease accounting guidance with an offset to Net Position:

Dr. Capital Lease Liability (GL#720)                                              $51,000
            Cr. Capital Lease Asset (GL#710)                                                          $48,000
   Cr. Net Position (GL#1000)                                                                  $3,000

(GASB 87: Paragraphs 37-39):
37. A lessee should disclose the following about its lease activities (which may be grouped for purposes of disclosure), other than short-term leases:

a. A general description of its leasing arrangements, including (1) the basis, terms, and conditions on which variable payments not included in the measurement of the lease liability are determined and (2) the existence, terms, and conditions of residual value guarantees provided by the lessee not included in the measurement of the lease liability
b. The total amount of lease assets, and the related accumulated amortization, disclosed separately from other capital assets
c. The amount of lease assets by major classes of underlying assets, disclosed separately from other capital assets
d. The amount of outflows of resources recognized in the reporting period for variable payments not previously included in the measurement of the lease liability
e. The amount of outflows of resources recognized in the reporting period for other payments, such as residual value guarantees or termination penalties, not previously included in the measurement of the lease liability
f. Principal and interest requirements to maturity, presented separately, for the lease liability for each of the five subsequent fiscal years and in five-year increments thereafter
g. Commitments under leases before the commencement of the lease term
h. The components of any loss associated with an impairment (the impairment loss and any related change in the lease liability, as discussed in paragraph 34).

38. A lessee also should provide relevant disclosures for the following transactions, if applicable:
a. Sublease transactions (see paragraph 81)
b. Sale-leaseback transactions (see paragraph 85)
c. Lease-leaseback transactions (see paragraph 87).

39. A lessee is not required to disclose collateral pledged as a security for a lease (under paragraph 113 of Statement 62) if that collateral is solely the asset underlying the lease.

(GASB 87: Paragraphs 57-58):
57. A lessor should disclose the following about its lease activities (which may be grouped for purposes of disclosure), other than short-term leases and certain regulated leases:
a. A general description of its leasing arrangements, including the basis, terms, and conditions on which any variable payments not included in the measurement of the lease receivable are determined
b. The total amount of inflows of resources (for example, lease revenue, interest revenue, and any other lease-related inflows) recognized in the reporting period from leases, if that amount cannot be determined based on the amounts displayed on the face of the financial statements
c. The amount of inflows of resources recognized in the reporting period form variable and other payments not previously included in the measurement of the lease receivable, including inflows of resources related to residual value guarantees and termination penalties
d. The existence, terms, and conditions of options by the lessee to terminate the lease or abate payments if the lessor government has issued debt for which the principal and interest payments are secured by the lease payments.

58. A lessor also should provide relevant disclosures for the following transactions, if applicable:
a. Leases of assets that are investments (see paragraph 41)
b. Certain regulated leases (see paragraph 60)
c. Sublease transactions (see paragraph 81)
d. Sale-leaseback transactions (see paragraph 85)
e. Lease-leaseback transactions (see paragraph 87).

59. In addition to the disclosures in paragraphs 57 and 58, if a lessor’s principal ongoing operations consist of leasing assets to other entities, the government should disclose a schedule of future payments that are included in the measurement of the lease receivable, showing principal and interest separately, for each of the five subsequent fiscal years and in five-year increments thereafter.

(GASB 96: Paragraphs 60-61):
60. A government should disclose in notes to financial statements the following information about its SBITAs (which may be grouped for purposes of disclosure) other than short-term SBITAs:

a. A general description of its SBITAs, including the basis, terms, and conditions on which variable payments not included in the measurement of the subscription liability are determined
b. The total amount of subscription assets, and the related accumulated amortization, disclosed separately from other capital assets
c. The amount of outflows of resources recognized in the reporting period for variable payments not previously included in the measurement of the subscription liability
d. The amount of outflows of resources recognized in the reporting period for other payments, such as termination penalties, not previously included in the measurement of the subscription liability
e. Principal and interest requirements to maturity, presented separately, for the subscription liability for each of the five subsequent fiscal years and in five-year increments thereafter
f. Commitments under SBITAs before the commencement of the subscription term
g. The components of any loss associated with an impairment (the impairment loss and any related change in the subscription liability, as discussed in paragraph 41).

61. For disclosure purposes, subscription liabilities are not considered debt that is subject to the disclosure requirements in Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements.

(GASB 94: Paragraphs 57-59):
57. An operator should disclose the following about its PPP activities (which may be grouped for purposes of disclosure):
a. A general description of its PPP arrangements, including the status of projects during the construction period, if applicable, and the basis, terms, and conditions on which any variable payments not included in the measurement of the liability for installment payments are determined
b. The nature and amounts of assets, liabilities, and deferred outflows of resources related to PPPs that are recognized in the financial statements
c. The discount rate or rates applied to the measurement of the liability for installment payments, if any
d. Principal and interest requirements to maturity, presented separately, for the liability for installment payments for each of the five subsequent fiscal years and in five-year increments thereafter
e. The amount of outflows of resources recognized in the reporting period for variable payments not previously included in the measurement of the liability for installment payments
f. The nature and extent of rights granted to the operator or retained by the transferor under PPP arrangements
g. The components of any loss associated with an impairment (the impairment loss and any related change in the liability, as discussed in paragraph 52).

58. For disclosure purposes, an operator’s liability for installment payments is not considered debt that is subject to the disclosure requirements of Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements.

59. Some PPP arrangements may include provisions for guarantees and commitments. For each period in which a guarantee or commitment exists, disclosures should be made about the guarantees and commitments, including identification, duration, and significant contract terms.

(GASB 94: Paragraphs 35-36):
35. A transferor should disclose the following about its PPP activities (which may be grouped for purposes of disclosure):
a. A general description of its PPP arrangements, including the status of projects during the construction period, if applicable, and the basis, terms, and conditions on which any variable payments not included in the measurement of the receivable for installment payments are determined
b. The nature and amounts of assets and deferred inflows of resources related to PPPs that are recognized in the financial statements
c. The discount rate or rates applied to the measurement of the receivable for installment payments, if any
d. The amount of inflows of resources recognized in the reporting period for variable and other payments not previously included in the measurement of the receivable for installment payments, including inflows of resources related to residual value guarantees and termination penalties
e. The nature and extent of rights retained by the transferor or granted to the operator under the PPP arrangements.

36. Some PPP arrangements may include provisions for guarantees and commitments. For each period in which a guarantee or commitment exists, disclosures should be made about the guarantees and commitments, including identification, duration, and significant contract terms.

(GASB 87: Paragraph 12, 94):
12. The lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period).

94. Leases should be recognized and measured using the facts and circumstances that existed at the beginning of the period of implementation. If applied to earlier periods, leases should be recognized and measured using the facts and circumstances that existed at the beginning of the earliest period restated.

(GASB 96: Paragraph 9, 64): 
9. The subscription term is the period during which a government has a noncancellable right to use the underlying IT assets (referred to as the noncancelable period).

64. Assets and liabilities resulting from SBITAs should be recognized and measured using the facts and circumstances that existed at the beginning of the fiscal year in which this Statement is implemented. If applied to earlier fiscal years, those assets and liabilities should be recognized and measured using the facts and circumstances that existed at the beginning of the earliest fiscal year restated. Governments are permitted, but are not required, to include in the measurement of the subscription asset capitalizable outlays associated with the initial implementation stage and the operation and additional implementation stage incurred prior to the implementation of this Statement

(GASB 94: Paragraph 10, 86): 

10. The PPP term is the period during which an operator has a noncancellable right to use an underlying PPP asset (referred to as the noncancellable period).

86. PPPs should be recognized and measured using the facts and circumstances that existed at the beginning of the fiscal year of implementation. If applied to earlier fiscal years, PPPs should be recognized and measured using the facts and circumstances that existed at the beginning of the earliest fiscal year restated.

(GASB 87: Paragraphs 12-13): 
12. The lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a lessee's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessee will exercise that option
b. Periods covered by a lessee's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessee will not exercise that option
c. Periods covered by a lessor's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessor will exercise that option
d. Periods covered by a lessor's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessor will not exercise that option.

13. A fiscal funding or cancellation clause allows governmental lessees to cancel a lease, typically on an annual basis, if the government does not appropriate funds for the lease payments. This type of clause should affect the lease term only if it is reasonably certain that the clause will be exercised.

(GASB Implementation Guide No.2019-3 4.15): Paragraph 12 of Statement 87 requires that periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party be excluded from the lease term.

(GASB 96: Paragraphs 9-10):
9. The subscription term is the period during which a government has a noncancellable right to use the underlying IT assets (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a government’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the government will exercise that option
b. Periods covered by a government’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the government will not exercise that option
c. Periods covered by a SBITA vendor’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will exercise that option
d. Periods covered by a SBITA vendor’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will not exercise that option.

Periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the subscription term. For example, a rolling month-to-month SBITA, or a SBITA that continues into a holdover period until a new SBITA contract is entered into, would not be enforceable if both the government and the SBITA vendor have an option to terminate and, therefore, either could cancel the SBITA at any time. Provisions that allow for termination of a SBITA as a result of either payment of all sums due or default on subscription payments are not considered termination options.

10. A fiscal funding or cancellation clause allows a government to cancel a SBITA, typically on an annual basis, if the government does not appropriate funds for the subscription payments. That type of clause should affect the subscription term only if it is reasonably certain that the clause will be exercised.

(GASB 94: Paragraphs 10-11):
10. The PPP term is the period during which an operator has a noncancellable right to use an underlying PPP asset (referred to as the noncancellable period), plus the following periods, if applicable:
a. Periods covered by an operator’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the operator will exercise that option
b. Periods covered by an operator’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the operator will not exercise that option
c. Periods covered by a transferor’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the transferor will exercise that option
d. Periods covered by a transferor’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the transferor will not exercise that option.

Periods for which both the operator and the transferor have an option to terminate the PPP without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the PPP term. For example, a PPP that continues into a holdover period until a new PPP arrangement is entered into, would not be enforceable if both the operator and the transferor have an option to terminate and, therefore, either could cancel the PPP at any time. Provisions that allow for termination of a PPP due to either payment of all sums due or default on payments are not considered termination options.

11. A fiscal funding or cancellation clause allows an operator to cancel a PPP, typically on an annual basis, if the operator does not appropriate funds for the PPP payments. That type of clause should affect the PPP term only if it is reasonably certain that the clause will be exercised.

(GASB 87: Paragraphs 12-13, 16): 
12. The lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a lessee's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessee will exercise that option
b. Periods covered by a lessee's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessee will not exercise that option
c. Periods covered by a lessor's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessor will exercise that option
d. Periods covered by a lessor's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessor will not exercise that option.

13. A fiscal funding or cancellation clause allows governmental lessees to cancel a lease, typically on an annual basis, if the government does not appropriate funds for the lease payments. This type of clause should affect the lease term only if it is reasonably certain that the clause will be exercised.

16. A short-term lease is a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. For a lease that is cancelable by either the lessee or the lessor, such as a rolling month-to-month lease or a year-to-year lease, the maximum possible term is the noncancelable period, including any notice periods.

(GASB Implementation Guide No.2019-3 4.15): Paragraph 12 of Statement 87 requires that periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party be excluded from the lease term.

(GASB 96: Paragraphs 9-10, 14):
9.The subscription term is the period during which a government has a noncancellable right to use the underlying IT assets (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a government’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the government will exercise that option
b. Periods covered by a government’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the government will not exercise that option
c. Periods covered by a SBITA vendor’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will exercise that option
d. Periods covered by a SBITA vendor’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will not exercise that option.

Periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the subscription term. For example, a rolling month-to-month SBITA, or a SBITA that continues into a holdover period until a new SBITA contract is entered into, would not be enforceable if both the government and the SBITA vendor have an option to terminate and, therefore, either could cancel the SBITA at any time. Provisions that allow for termination of a SBITA as a result of either payment of all sums due or default on subscription payments are not considered termination options.

10. A fiscal funding or cancellation clause allows a government to cancel a SBITA, typically on an annual basis, if the government does not appropriate funds for the subscription payments. That type of clause should affect the subscription term only if it is reasonably certain that the clause will be exercised.

14. A government should recognize short-term subscription payments as outflows of resources (for example, expense) based on the payment provisions of the SBITA contract.

(GASB 94: Paragraphs 10-11):
10. The PPP term is the period during which an operator has a noncancellable right to use an underlying PPP asset (referred to as the noncancellable period), plus the following periods, if applicable:
a. Periods covered by an operator’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the operator will exercise that option
b. Periods covered by an operator’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the operator will not exercise that option
c. Periods covered by a transferor’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the transferor will exercise that option
d. Periods covered by a transferor’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the transferor will not exercise that option.

Periods for which both the operator and the transferor have an option to terminate the PPP without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the PPP term. For example, a PPP that continues into a holdover period until a new PPP arrangement is entered into, would not be enforceable if both the operator and the transferor have an option to terminate and, therefore, either could cancel the PPP at any time. Provisions that allow for termination of a PPP due to either payment of all sums due or default on payments are not considered termination options.

11. A fiscal funding or cancellation clause allows an operator to cancel a PPP, typically on an annual basis, if the operator does not appropriate funds for the PPP payments. That type of clause should affect the PPP term only if it is reasonably certain that the clause will be exercised.

Start Date: 1/5/2023
End Date: 1/4/2024
Term: 13 Months
Lease Asset Life: 12 Months (Defaults to Term -1)
Amortization Expense over Term: $12,000

(GASB 87: Paragraphs 31-32 & 19): 
31. A lease asset should be amortized in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset, except as provided in paragraph 32. The amortization of the lease asset should be reported as an outflow of resources (for example, amortization expense), which may be combined with depreciation expense related to other capital assets for financial reporting purposes.

32. If a lease contains a purchase option that the lessee has determined is reasonably certain of being exercised, the lease asset should be amortized over the useful life of the underlying asset. In that circumstance, if the underlying asset is nondepreciable, such as land, the lease asset should not be amortized.

19. A contract that (a) transfers ownership of the underlying asset to the lessee by the end of the contract and (b) does not contain termination options (see paragraph 12), but that may contain a fiscal funding or cancellation clause that is not reasonably certain of being exercised (see paragraph 13), should be reported as a financed purchase of the underlying asset by the lessee or sale of the asset by the lessor.

(GASB 96: Paragraph 27): 
27. A subscription asset should be amortized in a systematic and rational manner over the shorter of the subscription term or the useful life of the underlying IT assets. The amortization of the subscription asset should be reported as an outflow of resources (for example, amortization expense), which may be combined with depreciation expense related to other capital assets for financial reporting purposes. Amortization should begin at the commencement of the subscription term as described in paragraph 15.

(GASB 94: Paragraph 50): 
50. A right-to-use asset should be amortized in a systematic and rational manner over the shorter of the PPP term or the useful life of the underlying PPP asset. The amortization of the right-to-use asset should be reported as an outflow of resources (for example, amortization expense), which may be combined with depreciation expense related to other capital assets for financial reporting purposes.

(GASB 87: Paragraphs 23, 27, B40): 
23. The future lease payments should be discounted using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease. If the interest rate cannot be readily determined by the lessee, the lessee's estimated incremental borrowing rate (an estimate of the interest rate that would be charged for borrowing the lease payment amounts during the lease term) should be used. Lessees are not required to apply the guidance for imputation of interest in paragraphs 173–187 of Statement 62 but may do so as a means of determining the interest rate implicit in the lease.

27. The lessee also should update the discount rate as part of the remeasurement if one or both of the following changes have occurred and the changes individually or in the aggregate are expected to significantly affect the amount of the lease liability:

a. There is a change in the lease term.
b. An assessment of all relevant factors indicates that the likelihood of a purchase option being exercised has changed from reasonably certain to not reasonably certain, or vice versa.

B40. The Board considered whether to provide guidance for selecting the discount rate to be used for making the present value calculation of the lease liability. The previous leases guidance in Statement 62 included provisions for determining the discount rate to be applied to a lease liability, and the Board agreed that reducing the level of guidance for this issue would not be desirable from a consistency standpoint. The Board concluded that the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease, is preferable because it is the rate at which the transaction is made. However, consistent with Statement 62, the Board also concluded that if the interest rate implicit in the lease is not readily determinable, the lessee’s estimated incremental borrowing rate is an acceptable alternative.

(Implementation Guide 2019-3 Paragraphs 4.31):
Q—A government leases a fleet of vehicles for half of the vehicles’ estimated useful lives. The lease term is 30 months. The lease does not specify the discount rate. Total monthly lease payments over the term of the lease are $1.1 million, and the fair value of the vehicles at the commencement of the lease is $2 million. May the fair value of the vehicles be used in determining the implicit discount rate of the lease?

A—Yes. Discounting the lease payments at the rate the lessor charges the lessee, explicitly or implicitly, arrives at the fair value of the right to use the vehicles, which is not necessarily equivalent to the fair value of the vehicles. Using the $2 million fair value of the vehicles at the commencement of the lease to determine the implicit discount rate in a lease may be appropriate if the government has determined that, considering the facts and circumstances of the agreement, the fair value of the vehicles approximates the fair value of the lessee’s right to use the vehicles at that time. If those values differ because the lease term is less than the entire useful life of the vehicles, the fair value of the right to use the vehicles for the lease term may be estimated using professional judgment, maximizing the use of observable information. In this example, the government has estimated that the fair value of the right to use the vehicles is $1 million because the length of the lease term is half of the vehicles’ estimated useful lives. The government assumes the fair value of the right to use the vehicles decreases ratably over the lease term because the service capacity of the vehicles remains the same throughout the lease term, even though the fair value of the vehicles decreases faster at the beginning of the lease term. Therefore, the interest associated with the lease is $100,000, and the discount rate is approximately 7.5 percent.

(GASB 87: Paragraphs 47, B40): 
47. The future lease payments to be received should be discounted using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease. Lessors are not required to apply the guidance for imputation of interest in paragraphs 173–187 of Statement 62 but may do so as a means of determining the interest rate implicit in the lease.

B40.The Board considered whether to provide guidance for selecting the discount rate to be used for making the present value calculation of the lease liability. The previous leases guidance in Statement 62 included provisions for determining the discount rate to be applied to a lease liability, and the Board agreed that reducing the level of guidance for this issue would not be desirable from a consistency standpoint. The Board concluded that the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease, is preferable because it is the rate at which the transaction is made. However, consistent with Statement 62, the Board also concluded that if the interest rate implicit in the lease is not readily determinable, the lessee’s estimated incremental borrowing rate is an acceptable alternative.

(Implementation Guide 2019-3 Paragraphs 4.31):
Q—A government leases a fleet of vehicles for half of the vehicles’ estimated useful lives. The lease term is 30 months. The lease does not specify the discount rate. Total monthly lease payments over the term of the lease are $1.1 million, and the fair value of the vehicles at the commencement of the lease is $2 million. May the fair value of the vehicles be used in determining the implicit discount rate of the lease?

A—Yes. Discounting the lease payments at the rate the lessor charges the lessee, explicitly or implicitly, arrives at the fair value of the right to use the vehicles, which is not necessarily equivalent to the fair value of the vehicles. Using the $2 million fair value of the vehicles at the commencement of the lease to determine the implicit discount rate in a lease may be appropriate if the government has determined that, considering the facts and circumstances of the agreement, the fair value of the vehicles approximates the fair value of the lessee’s right to use the vehicles at that time. If those values differ because the lease term is less than the entire useful life of the vehicles, the fair value of the right to use the vehicles for the lease term may be estimated using professional judgment, maximizing the use of observable information. In this example, the government has estimated that the fair value of the right to use the vehicles is $1 million because the length of the lease term is half of the vehicles’ estimated useful lives. The government assumes the fair value of the right to use the vehicles decreases ratably over the lease term because the service capacity of the vehicles remains the same throughout the lease term, even though the fair value of the vehicles decreases faster at the beginning of the lease term. Therefore, the interest associated with the lease is $100,000, and the discount rate is approximately 7.5 percent.

(GASB 96: Paragraph 18, 22):
18. The future subscription payments should be discounted using the interest rate the SBITA vendor charges the government, which may be the interest rate implicit in the SBITA. If the interest rate cannot be readily determined by the government, the government’s estimated incremental borrowing rate (an estimate of the interest rate that would be charged for borrowing the subscription payment amounts during the subscription term) should be used. A government is not required to apply the guidance for imputation of interest in paragraphs 173–187 of Statement 62, as amended, but may do so as a means of determining the interest rate implicit in the SBITA.

22. A government also should update the discount rate as part of the remeasurement if there is a change in the subscription term and that change is expected to significantly affect the amount of the subscription liability.

(GASB 94: Paragraph 42, 46):
42. The future PPP payments should be discounted using the interest rate the transferor charges the operator, which may be the interest rate implicit in the PPP arrangement. If the interest rate cannot be readily determined by the operator, the operator’s estimated incremental borrowing rate (an estimate of the interest rate that would be charged for borrowing the PPP installment payment amounts during the PPP term) should be used. The operator is not required to apply the guidance for imputation of interest in paragraphs 173–187 of Statement 62 but may do so as a means of determining the interest rate implicit in the PPP arrangement.

46. An operator also should update the discount rate as part of the remeasurement if there is a change13 in the PPP term and that change is expected to significantly affect the amount of the liability for installment payments.

(GASB 94: Paragraph 25, 29):
25. The future PPP payments to be received should be discounted using the interest rate the transferor charges the operator, which may be the interest rate implicit in the PPP. A transferor is not required to apply the guidance for imputation of interest in paragraphs 173–187 of Statement 62 but may do so as a means of determining the interest rate implicit in the PPP arrangement.

29. A transferor also should update the discount rate as part of the remeasurement if one or both of the following changes10 have occurred and the changes individually or in the aggregate are expected to significantly affect the amount of the receivable for installment payments:
a. There is a change in the PPP term.
b. There is a change in the interest rate the transferor charges the operator

(GASB 87: Paragraphs 61-62, 30): 
61. As used in this Statement, lease incentives are (a) payments made to, or on behalf of, the lessee, for which the lessee has a right of offset with its obligation to the lessor, or (b) other concessions granted to the lessee. A lease incentive is equivalent to a rebate or discount and includes assumption of a lessee's preexisting lease obligations to a third party, other reimbursements of lessee costs, rent holidays, and reductions of interest or principal charges by the lessor.

62. Lease incentives reduce the amount that a lessee is required to pay for a lease. Lease incentives that provide payments to, or on behalf of, a lessee at or before the commencement of a lease term are included in initial measurement by directly reducing the amount of the lease asset (see paragraph 30). Lease incentive payments to be provided after the commencement of the lease term should be accounted for by lessees and lessors as reductions of lease payments for the periods in which the incentive payments will be provided. Those payments should be measured by lessees consistently with the lessee's lease liability (paragraphs 21–29) and by lessors consistently with the lessor's lease receivable (paragraphs 44–52). Accordingly, lease incentive payments to be provided after the commencement of the lease term are included in initial measurement and any remeasurement if they are fixed or fixed in substance, whereas variable or contingent lease incentive payments are not included in initial measurement.

30. A lessee initially should measure the lease asset as the sum of the following:

a. The amount of the initial measurement of the lease liability (see paragraph 21)
b. Lease payments made to the lessor at or before the commencement of the lease term, less any lease incentives (as discussed in paragraphs 61 and 62) received from the lessor at or before the commencement of the lease term
c. Initial direct costs that are ancillary charges necessary to place the lease asset into service.

(GASB 96: Paragraphs 42-43): 
42. As used in this Statement, incentives provided by a SBITA vendor (SBITA vendor incentives) are (a) payments made to, or on behalf of, a government for which the government has a right of offset with its obligation to the SBITA vendor or (b) other concessions granted to the government. A SBITA vendor incentive is equivalent to a rebate or discount and includes an agreement to pay a government’s preexisting subscription obligations to a third party, other reimbursements of end user costs, free subscription periods, and reductions of interest or principal charges by the SBITA vendor.

43. SBITA vendor incentives reduce the amount that a government is required to pay for a SBITA. SBITA vendor incentives that provide payments to, or on behalf of, a government at or before the commencement of a subscription term should be included in initial measurement by directly reducing the amount of the subscription asset. (See paragraphs 25 and 26.) SBITA vendor incentives that provide payments after the commencement of the subscription term should be factored into the present value of the subscription payments for the periods in which the incentive payments will be provided, when initially measuring the subscription liability, as described in paragraph 16e. Accordingly, SBITA vendor incentive payments to be provided after the commencement of the subscription term are included in the initial measurement and any remeasurement of the subscription liability if the incentive payments are fixed or fixed in substance, whereas variable or contingent incentive payments are not included.

(GASB 87: Paragraph 30): Initial Direct Costs are ancillary charges necessary to place the lease asset in service. Any initial direct costs that would be considered debt issuance costs under paragraph 12 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, should be recognized as outflows of resources (for example, expense) in the period in which they are incurred.

(GASB 87: Paragraph B49): Ancillary charges necessary to place an asset into service are capitalized as part of the cost of that asset under paragraph 18 of Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments. Debt issuance costs other than insurance, described in paragraph 12 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, as amended, are recognized as an expense or expenditure of the period in which they are incurred. To be consistent with those provisions, the Board decided that initial direct costs associated with a lease (for example, structuring fees such as legal and administrative costs) should be accounted for as if they were paid in a financed purchase of a capital asset. The Board considered accounting for all initial direct costs the same way (either capitalizing or expensing all of them) as a matter of practicality, but it believes that governments are accustomed to making these determinations and, therefore, would not have significant difficulty in applying this provision.

(GASB 96: Paragraphs 29b, 35):
29b. Initial Implementation Stage. Activities in this stage include ancillary charges related to designing the chosen path, such as configuration, coding, testing, and installation associated with the government’s access to the underlying IT assets. Other ancillary charges necessary to place the subscription asset into service also should be included in this stage. The initial implementation stage for the SBITA is completed when the subscription asset is placed into service.

35. Outlays associated with activities in the initial implementation stage generally should be capitalized as part of the subscription asset

(GASB 94: Paragraph 49e): Initial direct costs that are ancillary charges necessary to place the right-to-use asset into service.

(GASB 87: Paragraphs 21, 22, 62, 67, 26):
21. A lessee initially should measure the lease liability at the present value of payments expected to be made during the lease term. Measurement of the lease liability should include the following, if required by a lease:

a. Fixed payments
b. Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate as of the commencement of the lease term
c. Variable payments that are fixed in substance (as discussed in paragraph 22)
d. Amounts that are reasonably certain of being required to be paid by the lessee under residual value guarantees
e. The exercise price of a purchase option if it is reasonably certain that the lessee will exercise that option
f. Payments for penalties for terminating the lease, if the lease term reflects the lessee exercising (1) an option to terminate the lease or (2) a fiscal funding or cancellation clause
g. Any lease incentives (as discussed in paragraphs 61 and 62) receivable from the lessor
h. Any other payments that are reasonably certain of being required based on an assessment of all relevant factors.

22. Variable payments based on future performance of the lessee or usage of the underlying asset should not be included in the measurement of the lease liability. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the lease liability.

62. Lease incentives reduce the amount that a lessee is required to pay for a lease. Lease incentives that provide payments to, or on behalf of, a lessee at or before the commencement of a lease term are included in initial measurement by directly reducing the amount of the lease asset (see paragraph 30). Lease incentive payments to be provided after the commencement of the lease term should be accounted for by lessees and lessors as reductions of lease payments for the periods in which the incentive payments will be provided. Those payments should be measured by lessees consistently with the lessee's lease liability (paragraphs 21–29) and by lessors consistently with the lessor's lease receivable (paragraphs 44–52). Accordingly, lease incentive payments to be provided after the commencement of the lease term are included in initial measurement and any remeasurement if they are fixed or fixed in substance, whereas variable or contingent lease incentive payments are not included in initial measurement.

67. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 66, lessees and lessors should use professional judgment to determine their best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single lease unit.

26. A lease liability is not required to be remeasured solely for a change in an index or rate used to determine variable payments.

(GASB 96: Paragraphs 16-17):

16. A government initially should measure the subscription liability at the present value of subscription payments expected to be made during the subscription term. Measurement of the subscription liability should include the following, if required by a SBITA:

a. Fixed payments
b. Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), measured using the index or rate as of the commencement of the subscription term
c. Variable payments that are fixed in substance, as discussed in paragraph 17
d. Payments for penalties for terminating the SBITA, if the subscription term reflects the government exercising (1) an option to terminate the SBITA or (2) a fiscal funding or cancellation clause
e. Any subscription contract incentives (as discussed in paragraphs 42 and 43) receivable from the SBITA vendor
f. Any other payments to the SBITA vendor associated with the SBITA contract that are reasonably certain of being required based on an assessment of all relevant factors.

17. Variable payments other than those that depend on an index or a rate, such as variable payments based on future performance of a government, usage of the underlying IT assets, or number of user seats, should not be included in the measurement of the subscription liability. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the subscription liability.

(GASB 94: Paragraphs 40-41):

40. An operator initially should measure the liability for installment payments at the present value of PPP payments expected to be made during the PPP term. Measurement of the liability for installment payments should include the following, if required by a PPP:
a. Fixed payments
b. Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate as of the commencement of the PPP term
c. Variable payments that are fixed in substance, as discussed in paragraph 41
d. Amounts that are reasonably certain of being required to be paid by the operator under residual value guarantees
e. Payments for penalties for terminating the PPP, if the PPP term reflects the operator exercising (1) an option to terminate the PPP or (2) a fiscal funding or cancellation clause
f. Any other payments to the transferor associated with the PPP that are reasonably certain of being required based on an assessment of all relevant factors.

41. Variable payments, including payments related to revenue sharing arrangements, based on future performance of the operator, usage of the underlying PPP asset, or variable factors other than an index or a rate, should not be included in the measurement of the liability for installment payments. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the liability for installment payments.

(GASB 87: Paragraphs 44-46):
44. A lessor initially should measure the lease receivable at the present value of lease payments expected to be received during the lease term, reduced by any provision for estimated uncollectible amounts. Measurement of the lease receivable should include the following, if required by a lease:
a. Fixed payments
b. Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate as of the commencement of the lease term
c. Variable payments that are fixed in substance (as discussed in paragraph 45)
d. Residual value guarantee payments that are fixed in substance (as discussed in paragraph 46)
e. Any lease incentives (as discussed in paragraphs 61 and 62) payable to the lessee.

45. Variable payments based on future performance of the lessee or usage of the underlying asset should not be included in the measurement of the lease receivable. Rather, those variable payments should be recognized as inflows of resources (for example, revenue) in the period to which those payments relate. However, any component of those variable payments that is fixed in substance should be included in the measurement of the lease receivable.

46. Amounts to be received under residual value guarantees (that are not fixed in substance) should be recognized as a receivable and an inflow of resources if (a) a guarantee payment is required (as agreed to by the lessee and lessor) and (b) the amount can be reasonably estimated. Amounts to be received for the exercise price of a purchase option or penalty for lease termination should be recognized as a receivable and an inflow of resources (for example, revenue) when those options are exercised.

(GASB 94: Paragraphs 22-24):
22. A transferor initially should measure the receivable for installment payments at the present value of PPP payments expected to be received during the PPP term, reduced by any provision for estimated uncollectible amounts. Measurement of the receivable for installment payments should include the following, if required by a PPP:
a. Fixed payments
b. Variable payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate as of the commencement of the PPP term
c. Variable payments that are fixed in substance, as discussed in paragraph 23
d. Residual value guarantee payments that are fixed in substance.

23. Variable payments, including payments related to revenue sharing arrangements, based on future performance of the operator, usage of the underlying PPP asset, or variable factors other than an index or a rate, should not be included in the measurement of the receivable for installment payments. Rather, those variable payments should be recognized as inflows of resources (for example, revenue) in the period to which those payments relate. However, any component of those variable payments that is fixed in substance should be included in the measurement of the receivable for installment payments.

24. Amounts to be received under residual value guarantees (that are not fixed in substance) should be recognized as a receivable for installment payments and an inflow of resources if (a) a guarantee payment is required (as agreed to by the transferor and the operator) and (b) the amount can be reasonably estimated. Amounts to be received for a PPP termination penalty should be
recognized as a receivable for installment payments and an inflow of resources (for example, revenue) when that option is exercised.

(GASB 87: Paragraphs 22, B38 & 26):
22. Variable payments based on future performance of the lessee or usage of the underlying asset should not be included in the measurement of the lease liability. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the lease liability.

B38. Variable payments that depend on future performance of the lessee or usage of the underlying asset by the lessee do not have a baseline measurement at the commencement of the lease term and, therefore, are excluded from the measurement of the liability. There may be expectations of the levels of future performance or usage, but estimating those amounts may not be practical because they are dependent upon events or transactions that have not occurred. The Board decided that variable payments that depend on future performance of the lessee or usage of the underlying asset by the lessee should not be included in the measurement of the lease liability. However, the Board concluded that any minimum guarantee amount or other portions of those variable payments that are fixed in substance can be reliably measured and, therefore, should be included in the lease liability because they are not dependent upon events or transactions that have not occurred.

26. A lease liability is not required to be remeasured solely for a change in an index or rate used to determine variable payments.

(GASB 96: Paragraph 17)
17. Variable payments other than those that depend on an index or a rate, such as variable payments based on future performance of a government, usage of the underlying IT assets, or number of user seats, should not be included in the measurement of the subscription liability. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the subscription liability.

(GASB 94: Paragraph 41):
41. Variable payments, including payments related to revenue sharing arrangements, based on future performance of the operator, usage of the underlying PPP asset, or variable factors other than an index or a rate, should not be included in the measurement of the liability for installment payments. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the liability for installment payments.

(GASB 87: Paragraphs 64, 66-67):
64. If a lessee or lessor enters into a contract that contains both a lease component (such as the right to use a building) and a nonlease component (such as maintenance services for the building), the government should account for the lease and nonlease components as separate contracts unless the contract meets the exception in paragraph 67.

66. To allocate the contract price to the different components, lessees and lessors first should use any prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment, maximizing the use of observable information; for example, using readily available observable stand-alone prices. Stand-alone prices are those that would be paid or received if the same or similar assets were leased individually or if the same or similar nonlease components (such as services) were contracted individually. Some contracts provide discounts for bundling multiple leases or lease and nonlease components together in one contract. Those discounts may be taken into account when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices are each discounted by the same percentage from normal market prices, the discount included in those component prices would not appear to be unreasonable.

67. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 66, lessees and lessors should use professional judgment to determine their best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single lease unit.

(GASB 96: Paragraphs 45, 47-48)
45. If a government enters into a contract that contains both a subscription component and a nonsubscription component, the government should account for the subscription and nonsubscription components as separate contracts unless the contract meets the exception in paragraph 48.

47. To allocate the contract price to the different components, a government first should use any prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment, maximizing the use of observable information (for example, using readily available observable stand-alone prices). Stand-alone prices are those that would be paid if the right to use the same or similar IT asset components were contracted individually or if the right to use the same or similar nonsubscription components were contracted individually. Some contracts provide discounts for bundling multiple subscription components or bundling subscription and nonsubscription components together in one contract. Those discounts may be taken into account when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices each are discounted by the same percentage from normal market prices, the discount included in those component prices would not appear to be unreasonable.

48. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 47, a government should use professional judgment to determine its best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single SBITA. In addition, a government should account for a SBITA with multiple modules in which the subscription term commences at the same time for all modules (as described in paragraph 30) as a single SBITA.

(GASB 94: Paragraphs 61, 63-64)
61. If a transferor or an operator enters into an arrangement that contains both a PPP component (such as the right to operate a facility) and a non-PPP component (such as maintenance services for the facility), the transferor or the operator should account for the PPP and non-PPP components as separate arrangements unless the contract meets the exception in paragraph 64.

63. To allocate the contract price to the different components, a transferor or an operator first should use any prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment, maximizing the use of observable information (for example, using readily available observable stand-alone prices). Stand-alone prices are those that would be paid or received if the same or similar assets were acquired individually or if the same or similar non-PPP components (such as maintenance services) were contracted individually. Some contracts provide discounts for including multiple PPPs or PPP and non-PPP components together in one contract. Those discounts may be taken into account when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices each are discounted by the same percentage as normal market prices, the discount included in those component prices would not appear to be unreasonable.

64. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 63, a transferor or an operator should use professional judgment to determine their best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a transferor or an operator should account for those components as a single PPP.

(GASB 87: Paragraphs 45-46):
45. Variable payments based on future performance of the lessee or usage of the underlying asset should not be included in the measurement of the lease receivable. Rather, those variable payments should be recognized as inflows of resources (for example, revenue) in the period to which those payments relate. However, any component of those variable payments that is fixed in substance should be included in the measurement of the lease receivable.

46. Amounts to be received under residual value guarantees (that are not fixed in substance) should be recognized as a receivable and an inflow of resources if (a) a guarantee payment is required (as agreed to by the lessee and lessor) and (b) the amount can be reasonably estimated. Amounts to be received for the exercise price of a purchase option or penalty for lease termination should be recognized as a receivable and an inflow of resources (for example, revenue) when those options are exercised.

(GASB 94: Paragraphs 23-24):
23. Variable payments, including payments related to revenue sharing arrangements, based on future performance of the operator, usage of the underlying PPP asset, or variable factors other than an index or a rate, should not be included in the measurement of the receivable for installment payments. Rather, those variable payments should be recognized as inflows of resources (for example, revenue) in the period to which those payments relate. However, any component of those variable payments that is fixed in substance should be included in the measurement of the receivable for installment payments.

24. Amounts to be received under residual value guarantees (that are not fixed in substance) should be recognized as a receivable for installment payments and an inflow of resources if (a) a guarantee payment is required (as agreed to by the transferor and the operator) and (b) the amount can be reasonably estimated. Amounts to be received for a PPP termination penalty should be
recognized as a receivable for installment payments and an inflow of resources (for example, revenue) when that option is exercised.

(GASB 87: Paragraphs 64, 66-67):
64. If a lessee or lessor enters into a contract that contains both a lease component (such as the right to use a building) and a nonlease component (such as maintenance services for the building), the government should account for the lease and nonlease components as separate contracts unless the contract meets the exception in paragraph 67.

66. To allocate the contract price to the different components, lessees and lessors first should use any prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment, maximizing the use of observable information; for example, using readily available observable stand-alone prices. Stand-alone prices are those that would be paid or received if the same or similar assets were leased individually or if the same or similar nonlease components (such as services) were contracted individually. Some contracts provide discounts for bundling multiple leases or lease and nonlease components together in one contract. Those discounts may be taken into account when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices are each discounted by the same percentage from normal market prices, the discount included in those component prices would not appear to be unreasonable.

67. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 66, lessees and lessors should use professional judgment to determine their best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single lease unit.

(GASB 94: Paragraphs 61, 63-64)
61. If a transferor or an operator enters into an arrangement that contains both a PPP component (such as the right to operate a facility) and a non-PPP component (such as maintenance services for the facility), the transferor or the operator should account for the PPP and non-PPP components as separate arrangements unless the contract meets the exception in paragraph 64.

63. To allocate the contract price to the different components, a transferor or an operator first should use any prices for individual components that are included in the contract, as long as the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment, maximizing the use of observable information (for example, using readily available observable stand-alone prices). Stand-alone prices are those that would be paid or received if the same or similar assets were acquired individually or if the same or similar non-PPP components (such as maintenance services) were contracted individually. Some contracts provide discounts for including multiple PPPs or PPP and non-PPP components together in one contract. Those discounts may be taken into account when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices each are discounted by the same percentage as normal market prices, the discount included in those component prices would not appear to be unreasonable.

64. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable as provided in paragraph 63, a transferor or an operator should use professional judgment to determine their best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a transferor or an operator should account for those components as a single PPP.

(GASB 87: Paragraphs 12-13, 16): 
12. The lease term is the period during which a lessee has a noncancelable right to use an underlying asset (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a lessee's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessee will exercise that option
b. Periods covered by a lessee's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessee will not exercise that option
c. Periods covered by a lessor's option to extend the lease if it is reasonably certain, based on all relevant factors, that the lessor will exercise that option
d. Periods covered by a lessor's option to terminate the lease if it is reasonably certain, based on all relevant factors, that the lessor will not exercise that option.

13. A fiscal funding or cancellation clause allows governmental lessees to cancel a lease, typically on an annual basis, if the government does not appropriate funds for the lease payments. This type of clause should affect the lease term only if it is reasonably certain that the clause will be exercised.

16. A short-term lease is a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. For a lease that is cancelable by either the lessee or the lessor, such as a rolling month-to-month lease or a year-to-year lease, the maximum possible term is the noncancelable period, including any notice periods.

(GASB Implementation Guide No.2019-3 4.15): Paragraph 12 of Statement 87 requires that periods for which both the lessee and the lessor have an option to terminate the lease without permission from the other party be excluded from the lease term.

(GASB 96: Paragraphs 9-10, 14):
9.The subscription term is the period during which a government has a noncancellable right to use the underlying IT assets (referred to as the noncancelable period), plus the following periods, if applicable:

a. Periods covered by a government’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the government will exercise that option
b. Periods covered by a government’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the government will not exercise that option
c. Periods covered by a SBITA vendor’s option to extend the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will exercise that option
d. Periods covered by a SBITA vendor’s option to terminate the SBITA if it is reasonably certain, based on all relevant factors, that the SBITA vendor will not exercise that option.

Periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the subscription term. For example, a rolling month-to-month SBITA, or a SBITA that continues into a holdover period until a new SBITA contract is entered into, would not be enforceable if both the government and the SBITA vendor have an option to terminate and, therefore, either could cancel the SBITA at any time. Provisions that allow for termination of a SBITA as a result of either payment of all sums due or default on subscription payments are not considered termination options.

10. A fiscal funding or cancellation clause allows a government to cancel a SBITA, typically on an annual basis, if the government does not appropriate funds for the subscription payments. That type of clause should affect the subscription term only if it is reasonably certain that the clause will be exercised.

14. A government should recognize short-term subscription payments as outflows of resources (for example, expense) based on the payment provisions of the SBITA contract.

(GASB 94: Paragraphs 10-11):
10. The PPP term is the period during which an operator has a noncancellable right to use an underlying PPP asset (referred to as the noncancellable period), plus the following periods, if applicable:
a. Periods covered by an operator’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the operator will exercise that option
b. Periods covered by an operator’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the operator will not exercise that option
c. Periods covered by a transferor’s option to extend the PPP if it is reasonably certain, based on all relevant factors, that the transferor will exercise that option
d. Periods covered by a transferor’s option to terminate the PPP if it is reasonably certain, based on all relevant factors, that the transferor will not exercise that option.

Periods for which both the operator and the transferor have an option to terminate the PPP without permission from the other party (or if both parties have to agree to extend) are cancellable periods and are excluded from the PPP term. For example, a PPP that continues into a holdover period until a new PPP arrangement is entered into, would not be enforceable if both the operator and the transferor have an option to terminate and, therefore, either could cancel the PPP at any time. Provisions that allow for termination of a PPP due to either payment of all sums due or default on payments are not considered termination options.

11. A fiscal funding or cancellation clause allows an operator to cancel a PPP, typically on an annual basis, if the operator does not appropriate funds for the PPP payments. That type of clause should affect the PPP term only if it is reasonably certain that the clause will be exercised.

(GASB 87: Paragraphs 14, B22-B23):
14. At the commencement of the lease term, the lessee and the lessor should assess all factors relevant to the likelihood that the lessee or the lessor will exercise options identified in paragraphs 12a–12d, whether these factors are contract based, underlying asset based, market based, or government specific. The assessment often will require the consideration of a combination of these interrelated factors. Examples of factors to consider include, but are not limited to, the following:

a. A significant economic incentive, such as contractual terms and conditions for the optional periods that are favorable compared with current market rates
b. A significant economic disincentive, such as costs to terminate the lease and sign a new lease (for example, negotiation costs, relocation costs, abandonment of significant leasehold improvements, costs of identifying another suitable underlying asset, costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location, or a substantial cancellation penalty)
c. The history of exercising options to extend or terminate
d. The extent to which the asset underlying the lease is essential to the provision of government services.

B22. The Board initially considered several probability thresholds for including a period covered by an extension or termination option in the lease term, including more likely than not, probable, virtually certain, and a significant economic incentive to exercise the option. In the Preliminary Views, the Board proposed using a threshold of probable for consistency with guidance in Statement 62 for recognition of a liability arising from a contingency. In response to concerns expressed by respondents to the Preliminary Views, the Board decided to propose reasonably certain in the Exposure Draft as the threshold for including periods in the lease term covered by options to extend or terminate. The Board believes that the term reasonably certain, although also requiring the use of professional judgment, is a higher threshold and is less speculative than probable. Additionally, it essentially retains the threshold of reasonably assured in the prior leases guidance in Statement 62.

B23. The Board also discussed the factors a government should consider when determining the likelihood that an extension or termination option will be exercised. Although the Board acknowledges that having a significant economic incentive may be a good indicator that an option will be exercised, governments do not always make decisions solely for economic reasons. Therefore, a government should consider all relevant factors, including but not limited to economic factors, in determining the likelihood that an option will be exercised. The Board also believes that a lessor should be able to make that assessment at the commencement of the lease term based on information received about the lessee's plans during the lease negotiations.

(GASB 96: Paragraph 11):

11. At the commencement of the subscription term, a government should assess all factors relevant to the likelihood that the government or the SBITA vendor will exercise the options identified in paragraphs 9a–9d, whether those factors are contract based, underlying IT asset based, market based, or government specific. The assessment often will require the consideration of a combination of interrelated factors. Examples of factors to consider include, but are not limited to, the following:

a. A significant economic incentive, such as contractual terms and conditions for the optional periods that are favorable compared with current market rates
b. A potential change in technological development that significantly affects the technology used by the underlying IT assets
c. A potential significant change in the government’s demand for the SBITA vendor’s IT assets
d. A significant economic disincentive, such as costs to terminate the SBITA and sign a new SBITA (for example, negotiation costs, costs of identifying another suitable underlying IT asset or another suitable SBITA vendor, implementation costs, or a substantial cancellation penalty)
e. The history of exercising options to extend or terminate
f. The extent to which the underlying IT assets in the SBITA are essential to the provision of government services.

(GASB 94: Paragraph 12):

12. At the commencement of the PPP term, a transferor and an operator should assess all factors relevant to the likelihood that the transferor or the operator will exercise options identified in paragraphs 10a–10d, whether these factors are contract based, underlying asset based, market based, or government specific. The assessment often will require the consideration of a combination of those interrelated factors. Examples of factors to consider include, but are not limited to, the following:
a. A significant economic incentive, such as contractual terms and conditions for the optional periods that are favorable compared with current market rates
b. A significant economic disincentive, such as costs to terminate the PPP and sign a new PPP arrangement (for example, negotiation costs, relocation costs, abandonment of significant underlying PPP asset improvements, costs associated with returning the underlying PPP assets in a contractually specified condition or to a contractually specified location, or a substantial cancellation penalty)
c. The history of exercising options to extend or terminate
d. The extent to which the underlying PPP asset is essential to the provision of government services.