GASB-87 IMPLEMENTATION RISKS AND LESSONS LEARNEDEric S. Berman, MSA, CPA, CGMA, Partner, Eide Bailly, LLPDianne E. Ray, CPA, MPA, Colorado State Auditor, GASB Board Member

AGENDA

• Beyond the GAAP - Lessons Learned From Governments Early Implementing GASB-87 – Yes there are a Few!• Where were the Issues?

• Key Focus Areas Likely to Impact the Risk of Material Misstatement• Financial Audits• Single Audits

BEYOND THE GAAP –LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

• Client Demographics• Approximately 850,000 population, $2.6 billion budget County in a western

state• 6 Elected Officials in addition to Board of Supervisors• 18 functions of government in addition to functions headed by elected

officials including• Agriculture• Airports• Fire Protection• Harbor• Healthcare (including County Hospital) • Information Technology• Public Works• Sheriff• Treasurer / Tax Collector• Others

LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

• Client Demographics• Many leases as lessee and lessor• Some sublease situations• Airports are commercial airports, but currently have no scheduled airline

service – nearest approximately 30 minutes west or 1 hour southeast• No regulated operations encountered

• Departments have traditionally negotiated their own leases based on general guidelines and approval from central General Services Agency• Fiscal funding clauses included• Lease files at each department• Beyond auditor / controller, department personnel had minimal knowledge of

GASB-87

LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

• Why did the County Early Implement?• Implementing an upgrade to ERP System - went live on July 1• AAA government – very forward-thinking auditor / controller staff

• What was the timeline?• Contract signed in February 2020• Onsite department training with all County personnel who had anything to do

with leasing was to occur in early March, but….• Department lease documents were to be uploaded to secure portal for

analysis by auditor / controller first and then by Eide Bailly within two weeks of training• Initial uploads completed in April 2020• Initial inventory included nearly 250 contracts

• Analysis by Eide Bailly with County was to be completed by May, finalized in June

• Go live with conversion entries and amortization table database upload by June 30th – made deadline

WHERE WERE THE ISSUES?

LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

• Policies and procedures need to be focused on from the get – go! Key P&Ps:Policy / Procedure Key Decision Points

Completeness • Centralize vs. decentralize data / decision-making? • Data warehousing?

Legal • Who are authorized signatories? • Who can initially approve / make changes? • Are there conflicts with laws, regulations, grant awards,

bond covenants?• Who approves leases with related parties?

Discount Rate Setting

• Who decides and when? • Should there be risk adjustments as a lessor?• Who recalculates variable rate adjusts as a lessor?• Who calculates implicit rates if necessary?

LESSONS LEARNED FROM EARLY IMPLEMENTING GASB-87

• Policies and procedures need to be focused on from the get – go! Key P&Ps:Policy / Procedure Key Decision Points

Components • What can be used for observable information?• Who in charge of making professional judgments?

Incentives • Who negotiates?• When are they recognized?• As a lessor, are there legal issues in giving an incentive?• Is there governance approval if lease is with related party

and contains an incentive?

ISSUES ENCOUNTERED IN IMPLEMENTATION

• Some leases were decades old – never renegotiated and in holdover period (month to month)

• As a lessor, County leased beachfront property to a hotel for 99 years at $100 per year

• Lots of ‘special case’ leases• Leases that were really easements, especially to cell

towers• Land swaps for lengthy periods for no consideration• Leases with many components, some pretty restrictive• Large combinations

ISSUES ENCOUNTERED IN IMPLEMENTATION

• 211 leases in initial inventory after initial review by County – about 1/3 scoped out due to: • Combinations• Power purchase agreements in the form of leases • Short-term as of July 1, 2020 without options to renew• Subscription-Based IT Arrangements (but information

held until future implementation of GASB-96)• Many leases were 100’s of pages and scans of scans

TYPICAL LEASE THAT WAS NOT A LEASE…

This is just a portion… original was signed in 1951 for 457 acres of land to place public safety communication towers, fire towers etc. on for $10 per year ostensibly for the use of a dirt road for access to the sites… (not an exchange / exchange-like transaction). Last renewal was in 1986 for $10 per year.

BTW – the document contained PII (social security numbers when transmitted)

TYPICAL ‘LEASE’ THAT MIGHT NOT BE A LEASE

Land is OK, but not cropland – but

luckily farm ceased operations effective 6/1/18

FIXED PAYMENT WITH VARIABLE AND NON-LEASE COMPONENTS, ALSO A COMBINATION

• Minimum is 45 million x .0219 = $985,500 for monochrome

This adjustment is an inflow /

outflow annually when known

Color is separate but no minimum

Supply costs not included in liability – outflows –Also – watch annual vs. monthly payments

SOME INTERESTING COMPONENTS

Classic nonleasecomponents –supplies – but paid by the

lessor – included assigned techs!

Contractor responsibilities

Contractor shall provide all Convenience Multifunctional Devices in accordance with the requirementslisted in the RFP, including, but not be limited to. the following items:

All necessary Segment 1 through 7 hardware, firmware, software, copy/print/scan meter readingsolution, document feeders, finishers. paper drawers, large capacity paper trays, print controllers,scanning servers (if applicable). fox boards (see Sections 3,1 through 3.2), saddle stitching finishers(if applicable), hole punching (if applicable) on LDAP authentication, finisher/feeder kits,scan/print licenses, PCL and Postscript page description languages, ramp up training, print drivers,network administration utilities, boards, cords, peripherals. Insurance, rental administration fees,return freight charges, grounding, power surge protection devices (line conditioners), 24-hour dataoverwrite protection, 30% post-consumer waste recycled 20 lb. bond 92 brightness paper, paperdelivery to each device installed/serviced under this Contract, a minimum of four (4) full-timefactory-trained, onsite, service technicians, additional technicians to ensure the requireduptime/response time provisions, emergency service, preventive maintenance service, networkingprinting and scanning support, ports. consumable parts, supplies. block toner, staples. fuser of (itapplicable), photoconductors, black developer, labor, firmware upgrades, software upgrades,drive lime, kip charges, hourly rates, freight, delivery, set-up, installation, order entry fees, de-installation at Contract completion, hard-drive data overwriting of de-installation, removal ofexisting the County owned/oft-rental equipment, property taxes and ongoing training.

Contractor shall deliver to County. within ninety (90) days, a list of all Contractor technicians andemployees which will be servicing this contract. the list is intended to provide the County insight intowho is servicing the contract, and on County property at any given time, the fist will be used by theCounty to verify appropriate background checks for services on County property, and supplysecurity access cards to Contractor.

The final device counts ore shown below.

CPE ATTENDANCE CHECK

Time for your next CPE code.

KEY FOCUS AREAS LIKELY TO IMPACT THE RISK OF MATERIAL MISSTATEMENT

Financial Audit Key Focus Areas Likely to Include:• Completeness• Recognition and

Measurement• Presentation and

Disclosure• Compliance with Laws

and Regulations (including Continuing Disclosure Requirements)

• Related Party Leases

Key Compliance (Uniform Guidance) Focus Areas May Include:• Consistency with

General Procurement Standards (200.318(d)) (lease vs. buy analysis)

• Claiming of interest cost (200.449(c)(4))

• Allowable costs of rental property (200.465)

• Applicable Programmatic Compliance Requirements

KEY FOCUS AREA - COMPLETENESS

• In other words – do we have it all?• Many governments have decentralized recordkeeping, approval and

operations• Personnel managing the leasing function may not be aware of GAAP• Contracts frequently have a form as a lease to circumvent debt limitations

and other laws and regulations prohibiting debt without referendum• To lower the risk of material misstatement, tests may include

• Review of ledgers / journals for recurring payments to same entities for lessees (inflows for lessors) using advanced data analytics

• Surveying / inquiry• Review of compliance with policies and procedures, especially for high risk

leases such as subleases, sale-leasebacks, lease-leasebacks and related party leases

• Review of amortization schedules for integrity• Sampling of contracts for lease provisions

KEY FOCUS AREA – RECOGNITION AND MEASUREMENT

• Are the lease elements calculated properly?• Did the government recognize the lease term and discount rate in accordance

with GAAP?• Are modifications, terminations, incentives, components and other adjustments

in accordance with GAAP?• To lower the risk of material misstatement, tests may include

• Review of ledgers / journals for recurring payments to same entities for lessees (inflows for lessors) using advanced data analytics

• Recalculation of sample of lease terms and discount rates, incentives, modifications, terminations, etc.

• Test components for consistency and alignment to observable inputs• Deep-dive review especially for high risk leases such as subleases, sale-

leasebacks, lease-leasebacks and related party leases• Review / recalculation of transition journal entries and any adjustments to

entries

KEY FOCUS AREA – PRESENTATION AND DISCLOSURE

• Are the lease elements presented and disclosed in accordance with GAAP?• Statement of Net Position assets, liabilities and deferred inflows of resources

presented in accordance with GASB-87?• Governmental Fund presentation – no changes

• Is disclosure properly presented in terms of leased assets, regulated operations, leases held as investments, lessor / lessee as applicable?

• To lower the risk of material misstatement, tests may include• Read of notes and trace to GASB-87• For leases that have been initiated, but property not in possession as of the

reporting date, review for commitment disclosure (no amounts in the statement of net position)

• Review for removal of prior GAAP disclosure (operating leases)• For transition year, review for propriety and completeness of restatement• Disclosure of related parties and component unit transactions

KEY FOCUS AREA – COMPLIANCE WITH LAWS AND REGULATIONS

• Does the lease comply (or not comply)?• Has it been properly approved by governance?• Compliance with debt covenants and grant award provisions

• Leases are debt – are limits complied with?• Did a referendum take place where required?

• To lower the risk of material misstatement, tests may include• Trace to laws and regulations• Review of governance minutes / budgets / appropriations / enabling

statutes for approval• Review for compliance with continuing disclosure agreements (again since

leases are debt)• Review for any modifications, terminations (especially as a lessor, due to

COVID)• For sale / leasebacks, review for actual sale and propriety

KEY FOCUS AREA – RELATED PARTIES

• Is the lease with a related party and if yes, is it properly disclosed?• Are local laws / regulations that require disclosure of related party

transactions complied with?• Is there a ‘sweetheart deal’ (off-market discount rate)

• To lower the risk of material misstatement, tests may include• Advanced data analytics for all related party transactions (comparison of all

ledger / journal records with list of related parties)• Comparison of any off-market leases to market rates for proper recognition

/ disclosure• Review for any ‘side-deals’ or financial engineering to result in a short-term

lease when in reality the lease is long-term• Review of any sale documents for sale – leaseback proper disclosure• Consideration of nonmonetary transactions

KEY FOCUS AREA – SINGLE AUDIT

• Caution: Federal Guidance not updated for GASB-87 (understandably) yet

• Could Include: Is the lease in compliance with the Uniform Guidance and any direct and material compliance requirements in the latest OMB Compliance Supplement?• If appropriate, was a lease vs. buy analysis performed?• Does the interest component of the discount rate reflect the least expensive

alternative versus debt financing of purchases?• Does the discount rate reflect market rates?

• Leases may also be subject to OMB Compliance Supplement provisions mainly involving allowable activities• Beware of special provisions due to CARES Act and other federal acts as a

result of COVID• HUD provisions a likely target

This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general information purposes only. Viewers are urged not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.

QUESTIONS?

eidebailly.com

Eric S. Berman, MSA, CPA, CGMAPartner

Eide Bailly, LLP208.424.3524626.375.3600

eberman@eidebailly.com

Dianne E. Ray, CPA, MPAState Auditor

State of ColoradoGASB Board Member

303.869.2800dianne.ray@state.co.us