Hi,
At some point in your next audit, someone is going to ask for a complete list of every contract your entity pays on a recurring basis. Most governments cannot produce that list, and the reason is that nobody was ever asked for it before.
Two GASB standards changed what those contracts are. Leases stopped being an expense line and became a right-to-use asset and a liability on your balance sheet. Then subscription-based IT arrangements got the same treatment. Your financial software, your utility billing system, your student information system, your body camera storage, your cloud backup: if the term runs longer than twelve months, it is no longer just a bill you pay each year. It is an asset and a liability that has to be measured, recorded, and amortized.
The standards themselves are settled. The problem is the inventory. Almost nobody has one, because these contracts were never centralized:
- The copier lease was signed by the office manager six years ago and renews automatically
- The vehicle and equipment leases live in the public works folder
- The modular classrooms are on a separate agreement the business office has never seen
- Software renewals are on a department credit card, approved by whoever uses the system
- The antenna lease on the water tower is in a drawer at the utility, and it has been there since before anyone currently employed started
And that last one points at the half most entities forget entirely. These standards apply when you are the lessor too. A town leasing space in a municipal building, farmland, a marina slip, a cell tower site, a concession stand at the ballfield: that is lease revenue that now has to be recognized differently than the cash you receive.
The consequences are not dramatic, which is exactly why they get deferred:
- An incomplete inventory produces an audit finding, and findings repeat until the underlying list is fixed
- Missed contracts discovered later force a prior period restatement, which is a conversation nobody wants to have at a public meeting
- Understated liabilities distort every ratio a rating agency or bond counsel looks at
- The work compounds. Each year you defer it, the catch-up exercise gets larger and the supporting documents get harder to find
The way through it is unglamorous and finite. Pull twelve months of recurring payments from the check register and the credit card statements. Match each one to a contract. Read the term and the renewal language. Decide what is short-term and genuinely excluded, and what has to be recognized. Then keep the list current as a matter of routine, so that next year is a review rather than an excavation.
That is the kind of engagement we take on directly:
- GASB 87 and GASB 96 implementation, including the initial contract inventory and the measurement work
- Lessor-side analysis for the revenue contracts your entity holds
- Restatement and prior period correction where contracts surface late
- Ongoing schedules and journal entries so the balances roll forward without a scramble
- Audit and Single Audit engagements, ACFR and AFR preparation, and fund accounting bookkeeping
Reply to this email by Friday and we will set up a free 15-minute call with one of our senior government specialists. Send us twelve months of recurring payments from your check register, and we will tell you on the call roughly how many of them are leases or subscriptions under these standards, and what that does to your statements. Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com