GASB 87 requires what action for most leases?

GASB 87 requires what action for most leases?

• A. Right-of-use asset and lease liability recognition.
• B. Only disclosures in notes.
• C. All leases capitalized.
• D. No recognition beyond cash payments.

Answer: (A)

Recognition of a right-of-use asset and a lease liability on the balance sheet is required for most leases under GASB 87. When a lease term exceeds 12 months, the government records a lease liability equal to the present value of future lease payments and a corresponding right-of-use asset representing the right to use the asset during the lease term. The initial measurement uses a discount rate—the rate implicit in the lease if readily determinable, or the incremental borrowing rate otherwise. Over time, interest accrues on the lease liability and payments reduce it, while the right-of-use asset is amortized or depreciated. This approach brings the economic substance of the lease onto the balance sheet, not just cash payments. Disclosures in notes fall short because they don’t reflect these noncash assets and obligations. Not all leases are simply capitalized; GASB 87 recognizes most leases on the balance sheet (with short-term exemptions) rather than treating them purely as cash outlays. So the best description is that the government recognizes both a right-of-use asset and a lease liability.

Recognition of a right-of-use asset and a lease liability on the balance sheet is required for most leases under GASB 87. When a lease term exceeds 12 months, the government records a lease liability equal to the present value of future lease payments and a corresponding right-of-use asset representing the right to use the asset during the lease term. The initial measurement uses a discount rate—the rate implicit in the lease if readily determinable, or the incremental borrowing rate otherwise. Over time, interest accrues on the lease liability and payments reduce it, while the right-of-use asset is amortized or depreciated. This approach brings the economic substance of the lease onto the balance sheet, not just cash payments.

Disclosures in notes fall short because they don’t reflect these noncash assets and obligations. Not all leases are simply capitalized; GASB 87 recognizes most leases on the balance sheet (with short-term exemptions) rather than treating them purely as cash outlays. So the best description is that the government recognizes both a right-of-use asset and a lease liability.