Staff Report Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy
STAFF REPORT
T
O: Mayor and Members of the City Council
FROM: Renee Eshun, Administrative Services Director
VIA: Dan Barros, City Manager
MEETING DATE: January 8, 2025
SUBJECT: Colma Administrative Code Subchapter 4:05: New Capitalization Policy
RECOMMENDATION
Staff recommends that the City Council adopts
RESOLUTION ADDING COLMA ADMINISTRATIVE CODE SUBCHAPTER 4.05, TO ADD A
NEW LEASE AND SUBSCRIPTION CAPITALIZATION POLICY PURSUANT TO CEQA GUIDELINE 15378.
COUNCIL ADOPTED VALUES
Responsible
B
ACKGROUND
The Governmental Accounting Standards Board (GASB) is an independent, non-profit, non- governmental regulatory body charged with setting accounting and financial reporting standards for state and local governments. GASB develops guidance to help state and local governments apply generally accepted accounting principles (GAAP). The GASB pronouncements are designed to provide guidance and information regarding changes to financial reporting and accounting procedures.
In June 2021, The Government Accounting Standards Board (GASB) issued Statement No. 87, also known as GASB 87 Leases effective as of fiscal year 2022. The objective of this statement is to increase the usefulness of governments financial statements by requiring recognition of certain lease assets and liabilities for all leases, including those that previously were classified as operating leases and recognized as income by lessors and expenditures by lessees. GASB 87 replaces the previous lease accounting methodology and establishes a single model for lease accounting based on the foundational principle that leases are financing of the right to use an underlying asset.
In June 2022, the Government Accounting Standards Board (GASB) issued Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs). GASB No. 96 establishes AGENDA ITEM #5
Staff Report Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy
uniform accounting and financial reporting requirements for SBITAs for government agencies who are currently using information technology software. According to GASB 96, a SBITA is a contract that conveys control of the right to use another party’s IT software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange-like transaction.
GASB No. 87 and GASB No. 96 requires the Town of Colma to capitalize all lease and subscription contracts for the right to use another party’s asset and Information Technology software. If every minor subscription or lease is capitalized this would create insurmountable work to record and track every contract and agreement.
On October 23, 2024, The Town of Colma adopted a resolution to approve the audit for fiscal year 2023.
At that time, O’ Connor and Company, the Town’s auditors, recommended that a capitalization policy be adopted by City Council. The threshold for capitalization of $50,000 is recommended by the Town’s auditor based on the materiality of leases and subscriptions.
ANALYSIS
As of June 30, 2024, the Town of Colma had 7 active subscriptions. The subscriptions have payments that range from $17,115 to $38,142 and interest rates that range from 1.7103% to 3.5113%. As of 06/30/2024, the total combined value of the subscription liability is $211,646, and the total combined value of the short-term subscription liability is $118,776. The combined value of the right to use asset, as of 06/30/2024 of $430,263 with accumulated amortization of $201,142 is included within the Subscription Class activities table found below. The subscriptions had $0 of Variable Payments and $0 of Other Payments, not included in the Subscription Liability, within the Fiscal Year.
Staff Report Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy
The table below displays the ending balance for subscription assets, liabilities and amortization schedule for fiscal year 2024. This will be recorded on balance sheet.
The Town of Colma does not have applicable lease assets or liabilities for fiscal year 2024.
Therefore, there will be no fiscal impact on balance sheet.
FISCAL IMPACT
There is no immediate fiscal impact in amending the administrative code to include Lease and subscription capitalization policy.
ALTERNATIVES
The City Council could choose not to adopt the resolution. This will require staff to account for contracts that are immaterial in amounts.
CONCLUSION
The Staff recommends the City Council adopt the resolution to amend the administrative code.
ATTACHMENTS
A. Resolution
B. Capitalization Policy
Res. 2025-__ - Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy Page 1 of 3 RESOLUTION NO. 2025-__
OF THE CITY COUNCIL OF THE TOWN OF COLMA
RESOLUTION ADDING COLMA ADMINISTRATIVE CODE SUBCHAPTER 4.05 TO ADD A
NEW LEASE AND SUBSCRIPTION CAPITALIZATION POLICY PURSUANT TO CEQA GUIDELINE 15378
T
he City Council of the Town of Colma hereby resolves:
ARTICLE 1. COLMA ADMINISTRATIVE CODE SUBCHAPTER 4.05 ADDED Subchapter 4.05 is hereby added to the Colma Administrative Code to read as follows:
SUBCHAPTER 4.05: Lease and Subscription Capitalization Policy
4.05.010 Purpose
The purpose of this policy is to establish the criteria and procedures for recognizing lease and subscription assets and liabilities on the balance sheet, as required by the Governmental Accounting Standards Board (GASB) Statements No. 87 and 96.
The policy applies to all lease and subscription agreements that contain lease or subscription components entered by The Town of Colma.
4.05.020 Definition
A lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset (property, plant, or equipment) for a period in exchange for consideration.
The lessee is the party that obtains the right to use the asset. The lessor is the party that owns the asset and makes it available for use by the lessee. GASB 87 is for capitalization of leases.
A subscription-based information technology arrangement (SBITAs) is a contract that gives the right to use another party’s IT software for a set period of time. SBITAs is also known as GASB 96.
4.05.030 Capitalization
The Town of Colma will adopt a capitalization threshold of $50,000 for leases and subscriptions with a term greater than 12 months. This means leases and subscriptions with an initial value of payments below $50,000 will not be recognize on the balance sheet. This threshold was based on the materiality of leases and subscriptions recommended by The Town of Colma auditors.
If a lease or subscription is capitalized, The Town of Colma will recognize a right-of-use asset and a lease or subscription liability on the balance sheet at the commencement date of the contract or agreement. The right-of-use asset will be measured at the amount of the lease or subscription liability plus any initial direct costs incurred by the Town of Colma. The lease or subscription liability will be measured at the present value of the payments that are not paid
ATTACHMENT A
Res. 2025-__ - Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy Page 2 of 3
at that date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, The Town of Colma incremental borrowing rate.
The Town of Colma will amortize the right -of-use asset over the lease or subscription term on a straight-line basis unless another systematic basis is more representative of the pattern of benefit. The Town of Colma will also recognize interest expense on the lease or subscription liability and reduce it by making payments.
The Town of Colma will present right -of-use assets and lease and subscription liabilities separately from other assets and liabilities on the balance sheet. Finance leases and subscriptions will be presented within property, plant and equipment and debt. Operating leases and subscriptions will be presented as separate line items. The Town of Colma will disclose information about its leases in the notes to the financial statements.
4.05.040 Procedure
The Town of Colma will follow these steps to implement this policy:
Identify all existing and new contracts that contain leases/Subscriptions or potential leases/subscriptions.
Evaluate whether each contract meets the definition of a lease under GASB 87 and whether it contains any embedded leases. Does the contract convey control of the right to use another entity’s underlying asset? Is the underlying asset controlled for a period of time in an exchange or exchange like transaction? Does the contract transfer ownership of the underlying asset to the lessee by the end of the contract? Does the contract contain termination options? Does the contract contain a fiscal funding or cancellation clause that is reasonably certain of being exercised? Is the contract period over 12 months?
Evaluate whether each contract meets the definition of a subscription under GASB 96. Does the subscription convey the right to use another party’s IT software? Does the contract convey the right to use another party’s IT software alone, or in combination with an underlying tangible capital asset? Is the contract a licensing arrangement that provides a perpetual license to use vendors software? Is the software controlled for a period of time in an exchange or exchange -like transaction? Is the contract period over 12 months?
Apply the criteria for capitalizing leases/subscription to each identified lease/subscription and determine whether it should be recognized on the balance sheet or not based on the capitalization threshold.
Measure and record right -of-use assets and lease and subscriptions liabilities at inception and subsequent periods for capitalized leases and subscriptions.
Present and disclose leases in the financial statements according to GASB 87 for Leases and GASB 96 for subscriptions requirements.
Res. 2025-__ - Adding CAC Subchapter 4.05 – Lease and Subscription Capitalization Policy Page 3 of 3
This policy will be reviewed periodically for changes in facts and circumstances that may affect its appropriateness.
ARTICLE 2. SEVERABILITY.
Each of the provisions of this resolution is severable from all other provisions. If any article, section, subsection, paragraph, sentence, clause or phrase of this resolution is for any reason held by a court of competent jurisdiction to be invalid, such decision shall not affect the validity of the remaining portions of this resolution. The City Council hereby declares that it intended do and would have adopted each and every provision of this resolution independent of any other provision of this resolution.
ARTICLE 3. N
OT A CEQA PROJECT.
The City Council finds that adoption of this resolution is not a "project," as defined in the California Environmental Quality Act (CEQA) because it is more akin to an administrative activity under CEQA Guideline 15378 and does not have a potential for resulting in either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment and concerns general policy and procedure making.
ARTICLE 4. E
FFECTIVE DATE.
This resolution shall be effective upon its adoption by the City Council.
Certification of Adoption
I certify that the foregoing Resoluti on No. 2025 -__ was duly adopted at a regular meeting of said City Council held January 8, 2025 by the following vote:
Name Voting Present, Not Voting Absent
Aye No Abstain Not Participating
Ken Gonzalez, Mayor
Carrie Slaughter, Vice Mayor
Joanne F. del Rosario
Helen Fisicaro
Thomas Walsh
Voting Tally
Dated ______________________ ___________________________________ Ken Gonzalez, Mayor
Attest: ____________________________
Michelle Estabillo, City Clerk
Lease and Subscription Capitalization Policy
January 2025
Administrative Code
CHAPTER FOUR: ORGANIZATION, FUNCTIONS AND GENERAL
PROVISIONS
SUBCHAPTER 4.05: Lease and Subscription Capitalization Policy
4.05.010 Purpose
The purpose of this policy is to establish the criteria and procedures for recognizing lease and subscription assets and liabilities on the balance sheet, as required by the Governmental Accounting Standards Board (GASB) Statements No. 87 and 96.
The policy applies to all lease and subscription agreements that contain lease or subscription components entered by The Town of Colma.
4 .05.020 Definition
A lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset (property, plant, or equipment) for a period in exchange for consideration.
The lessee is the party that obtains the right to use the asset. The lessor is the party that owns the asset and makes it available for use by the lessee. GASB 87 is for capitalization of leases.
A subscription-based information technology arrangement (SBITAs) is a contract that gives the right to use another party’s IT software for a set period of time. SBITAs is also known as GASB 96.
4.05.30 Capitalization
The Town of Colma will adopt a capitalization threshold of $50,000 for leases and subscriptions with a term greater than 12 months. This means leases and subscriptions with an initial value of payments below $50,000 will not be recognize on the balance sheet. This threshold was based on the materiality of leases and subscriptions recommended by The Town of Colma auditors.
If a lease or subscription is capitalized, The Town of Colma will recognize a right-of-use asset and a lease or subscription liability on the balance sheet at the commencement date of the contract or agreement. The right-of-use asset will be measured at the amount of the lease or subscription liability plus any initial direct costs incurred by the Town of Colma. The lease or subscription liability will be measured at the present value of the payments that are not paid at that date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, The Town of Colma incremental borrowing rate.
The Town of Colma will amortize the right -of-use asset over the lease or subscription term on a straight -line basis unless another systematic basis is more representative of the pattern of benefit. The Town of Colma will also recognize interest expense on the lease or subscription liability and reduce it by making payments.
ATTACHMENT B
Lease and Subscription Capitalization Policy
January 2025
Administrative Code
The Town of Colma will present right-of-use assets and lease and subscription liabilities separately from other assets and liabilities on the balance sheet. Finance leases and subscriptions will be presented within property, plant and equipment and debt. Operating leases and subscriptions will be presented as separate line items. The Town of Colma will disclose information about its leases in the notes to the financial statements. 4 .05.40 Procedure
The Town of Colma will follow these steps to implement this policy:
· Identify all existing and new contracts that contain leases/Subscriptions or potential leases/subscriptions.
· Evaluate whether each contract meets the definition of a lease under GASB 87 and whether it contains any embedded leases. Does the contract convey control of the right to use another entity’s underlying asset? Is the underlying asset controlled for a period of time in an exchange or exchange like transaction? Does the contract transfer ownership of the underlying asset to the lessee by the end of the contract? Does the contract contain termination options? Does the contract contain a fiscal funding or cancellation clause that is reasonably certain of being exercised? Is the contract period over 12 months?
-Evaluate whether each contract meets the definition of a subscription under GASB 96. Does the subscription convey the right to use another party’s IT software? Does the contract convey the right to use another party’s IT software alone, or in combination with an underlying tangible capital asset? Is the contract a licensing arrangement that provides a perpetual license to use vendors software? Is the software controlled for a period of time in an exchange or exchange- like transaction? Is the contract period over 12 months? · Apply the criteria for capitalizing leases/subscription to each identified lease/subscription and determine whether it should be recognized on the balance sheet or not based on the capitalization threshold.
· Measure and record right-of-use assets and lease and subscriptions liabilities at inception and subsequent periods for capitalized leases and subscriptions. · Present and disclose leases in the financial statements according to GASB 87 for Leases and GASB 96 for subscriptions requirements.
This policy will be reviewed periodically for changes in facts and circumstances that may affect its appropriateness.