 Hello and welcome to this session in which we will discuss GASP 87 or governmental leases. This topic is covered on the CPA exam as well as governmental accounting course. In this topic specifically is important because leases is an important topic on the CPA exam and there was a recent change. So usually they will ask you about some recent changes. So what I would do in presenting this topic, I'm going to show you the old rules real quick, then the new rules for after GASP 87. This will give you an idea about what to expect for the CPA exam. Now before we start, I would like to remind you whether you are an accounting student or a CPA candidate. I want you to take a look at my website, farhatlectures.com. I don't replace your CPA review course. So if you have a CPA review course, you can keep it. You need it to pass the exam. I am a useful addition. I'm a supplemental resource to your CPA review course. My material would work whether you are using Becker, Gleam, Roger Whaley or any other course. Your risk is one month of subscription. You can try me, see if it helps. I have helped hundreds, if not thousands, if not tens of thousands of students pass the exam. I strongly suggest you take a look at my website and if not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I also have resources for other college courses, such as governmental accounting intermediates. So if you're an accounting student, I strongly take a look at my website. If you haven't connected with me on LinkedIn, please do so and take a look at my LinkedIn recommendation. Like this recording, share it with other. Connect with me on Instagram, Facebook, Twitter and Reddit. So let's talk about GASB 87 before and after. Before GASB 87, let's take a look at the old, old rules, which we have capital leases and capital leases will determine based on whether you have a bargain purchase option or a transfer of ownership at the end of the lease. The life of the lease is in excess or greater than 75% of the useful life of the asset. The total minimum lease payments are equal or greater than 90% of the fair value or we have a specialized lease. So if it meets any of these criteria, it will be a capital lease, otherwise we'll deal, we'll deal with it as an operating lease. Now for this topic leases, just gonna make sure we are all on the same page. You can go to my website and look at my FAR material or you can look at my intermediate accounting course where I cover leases in depth. So that's a different story. I've just given you an overview, a reminder, but you just want to take a look at this topic, please visit my website for those lessons. Now after GASB 87, the government will classify the leases under three categories, short-term lease, lease with a contract to transfer ownership and all other. What does it mean all other? All others, it means it's not short-term and there's no transfer of ownership. So you understand what all others are. So everything else that doesn't meet those first two criteria is all others. Now how do we define a lease or what is a lease term? Just FYI, I'm sure you are comfortable with a lease because most likely you lease an apartment. What does it mean when you lease an apartment? Most likely you'd have leased an apartment if you're a college student. It means somebody gave you the right to use this asset, to use their building, to use their apartment for a period of time. So it's a contract that gives you control and right. You can use the asset of another entity's non-financial asset, which is their apartment and everything is specific in the contract. How long you're going to stay there? How much do you have to pay? Rules and regulation. Now from a governmental perspective, you have to understand the government can be LSC or can be a LSOAR. For example, the government can own a building and they can lease this building to a third party or the government might need a building and they might lease it from a private party. So it's either or they can, there's copiers, land, equipment, so on and so forth. So that's why we have to understand the LSOAR and the LSC. The term of the lease is usually not usually it should be specified in the contract. And the term of the lease is usually the non-cancelable period, which is the original period of the lease. You can add to it any reasonable amount of time, assuming you're going to exercise to extend the lease because in the lease contract, there's an option to exercise. If there's an option to terminate prior, it should be a prior notification. It should be taken into account. And any funding or an appropriation, why? Because for a government, sometimes they might sign a lease, but in the lease they may put down subject to renewal based on funding and appropriation. Simply put, if they cannot secure the money, they cannot have the they cannot extend the lease. So just know that for the term of the lease, you could have other criterias. Now let's take a look at the three types of leases, which is the first one is the short term, which is one of three. Remember we have short term. We have all others and we have lease with the option to buy, contract to buy. Short term is simply put less than 12 months. It's pretty straightforward dealing with those leases. You're going to debit an expense or an expenditure depending on the fund you are using and you're going to credit cash. If you are the lessor, you're going to debit cash, credit revenues or inflow of resources. And let's assume just to kind of illustrate this, a government lease the copier. Well, what they would do is they debit expense or expenditure for 10,000, credit cash for 10,000, assuming that's the payment. And after the lessor, they will debit cash and they will credit revenue or inflow of resources. Now bear in mind in private accounting for not FASB, for FASB, not GASB, you have rent holidays and in the rent holidays, what we do is we kind of take all this revenue and extend it over the period of the rent holidays, not in the case for governmental accounting. If there's any rent holidays, like the first month is you don't pay anything. We don't account for any revenues or expenditure when there's free month or rent holidays. The second type of leases is lease with a contract to transfer ownership. And if you really think about it, it's a lease, but there's a contract. You're going to transfer the ownership. So what are we talking about here? We're talking about a sale. So in substance, you are buying the asset because you have the contract to buy it. So technically you are buying. So what you do when you buy something, you debit an asset. You debit the equipment for 50,000 and you credit. So when you are buying it on account, you credit notes payable. Now bear in mind, if you buy the asset, guess what? You're going to have to do depreciation. Before you depreciate the asset, the depreciation expense credit, accumulated depreciation. That's from the leases perspective. From the less sore, basically, if they purchase the asset, you are selling the asset. So you'll have a receivable assuming you sold it on account. You have to remove the accumulated depreciation. You're selling the asset of any. You credit the asset itself. And if there's a gain or a loss, this is the entry for the less sore. You could have a gain. You could have a loss depending on what the situation is. But simply put, you sold the asset. You have a receivable. You remove the asset. You remove any accumulated depreciation. And you might either have a gain or a loss. Now also, when this happens, you have to have a disclosure. You have to disclose what is the principal amount? What's the interest amount? Because you're going to be receiving payment. You're going to have to disclose the terms of the lease. Simply put, it's a sale. Think of it that way. The third type, which is all others, which is if it's not, it's a greater than 12 month and there is no transfer of ownership. So for everything else, there's a single model for lease accounting. Basically what's going to happen is we're going to finance for the right to use the asset. So it's considered finance for the right to use. For the less C, they're going to have the right to use assets. They're going to have an intangible, the right to use of the asset. This is what they're going to have as a debit because they have the right to use it. And obviously they're going to have a liability, an obligation to make those payments. For the less sore, they're going to have a receivable and they're going to have a third inflow of resources. So how does it look like from an entry perspective? Well, guess what? For the less C, when they lease it, they're going to have the right to use the asset and lease liability. So this is the debit and this is the credit. For the less sore, they're going to have a lease receivable and they're going to have a third inflow of resources. That's their debit and that's their credit. So notice for the less sore, they did not transfer the asset. What does that mean? If they don't transfer the asset, it means they still have to depreciate the asset. Now we're going to start to make payment as the less C. Well, we're going to have to credit cash for the payment and the payment will have to be split between some of it will be lease liability because we have an obligation and we're reducing our liability and some of it will be for the interest expense because we have a liability. Liability will incur interest expense. So at this point, if you are dealing with this, you should know how to deal with a loan amortization schedule. Also, you have to do amortization expense because you have an intangible. Right of use asset is an intangible and hopefully, you know, for intangibles, we have to amortize. So you debit amortize expense and you credit right to use assets. So notice you have two expenses. You have the interest expense for the lease and you have the amortize expense for the lease for the less sore. When they receive subsequent payment, they would receive the cash and the cash will have to be split between lease receivable and revenue, which is a form of interest. Then you will also start to remove the deferred inflow of resources and credit revenue. So, you know, those can become these entries be combined. Of course, they can. And as I mentioned earlier, you still have the asset. You still retain the asset. Therefore, the less sore will have to debit depreciation expense and credit accumulated depreciation. And in a nutshell, those are the three types of leases that you have to worry about when it comes to governmental accounting. Now, look, other CPA review courses, for example, Becker or Roger or Glean or Wiley, they may take two minutes to explain all of this. You know, it took me maybe around eight to nine minutes. That's the difference between what I do and what those CPA courses does for you. I explain it to you in details as if you never looked at it. Then those CPA courses, they may review it in two minutes or less than two minutes. Well, that's the difference is I can teach you the material. Then you go to your CPA review course. Your investment is $29.99, one month of subscription. Give it a try. If you don't like it, look, that's the maximum you would lose. You cancel, say this guy, you know, promises me that they will help me. He could not, and that's what you lost. OK, but there's a potential that I could really help you understand the material. Do better on your CPA review course and do better on the exam itself. Don't shortchange yourself. The CPA is a long, is a lifetime investment. Take it seriously. Good luck, study hard, and of course, stay safe.