You are the CFO for a large county government that is a party to many lease agreements
Question:
You are the CFO for a large county government that is a party to many lease agreements as a lessee, totaling more than $100 million dollars in annual lease payments. (We will assume for simplicity’s sake that the county is not a lessor.) All of these lease agreements have more than a year left but have been structured in such a manner that they do not meet any of the criteria that would require them to be reported as capital leases under the existing standards. Therefore, no capital lease obligations payable are recognized as long-term liabilities.
You have just read the GASB Statement 87, Leases, and you realize the new standards could have a very significant impact on the county’s financial statements and, therefore, on the county’s reported financial health. This is something you need to bring to the attention of the County Executive, the county’s chief elected official (but she's not an accountant!).
This week’s assignment has two parts. First, based on your reading of the new lease requirements, you will analyze how implementing the standards would affect the amounts reported in the county’s financial statements.
Second, you will write a brief memorandum to the County Executive summarizing your findings. Your memorandum should cover not only the results of your analysis but also your evaluation of the policy impact that the changes in the county’s reported financial information could have.
Part 1
The following information is from the county's financial statements for the fiscal year ending December 31, 2020, for the primary government (in thousands of dollars):
Total assets | $5,519,445 |
Capital assets, net | 3,579,073 |
Total deferred outflows | 9,622 |
Total liabilities | 2,078,490 |
Long-term liabilities | 1,536,126 |
Outstanding bonds and notes | 1,256,754 |
Total deferred inflows of resources | 17,334 |
Net position: | |
Net investment in capital assets | 2,671,433 |
Restricted | 541,865 |
Unrestricted | 219,945 |
Total net position | 3,433,243 |
Total expenses | 3,516,728 |
Interest expenses – leases | 38,574 |
Total revenues | 3,598,824 |
Lease expenditures | 115,892 |
Other relevant information includes (in thousands of dollars):
Present value of all future lease payments in effect as of 12-31-20 | $317,645 |
Taxable assessed value of property | 44,514,992 |
State law limits the amount of outstanding debt (including capital leases) that a county may have to 3% of taxable assessed value of property.
Determine what amounts in the county’s financial statements would change if the proposed standards had been in effect as of 12-31-20, and what the new amounts would be. Be sure to show your relevant work.
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates