Agenda Item No. 7
CITY COUNCIL STAFF REPORT
TO: Honorable Mayor and City Council DATE: June 27, 2022 FROM: Matthew Bronson, City Manager
PREPARED BY: Deanne Purcell, Administrative Services Director SUBJECT: Approval of the City of Grover Beach Lease Policy
RECOMMENDATION
Review and approve the City of Grover Beach Lease Policy.
BACKGROUND
The Governmental Accounting Standards Board (GASB) issued Statement No. 87 (Leases) with the objective of being able to better meet the needs of financial statement users by improving accounting and financial reporting for leases by governments. This Statement establishes a single model for lease accounting based on the principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. The requirements of GASB Statement 87 becomes effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter.
Attachment 1 contains the City’s Lease Policy which is presented to the Council for approval. The main purpose of this policy is to develop a dollar threshold of $50,000 for leases that is considered significant for reporting purposes. The City has three such leases for Public Works and Police vehicles including the mobile command center. This threshold removes the burden of applying the provisions of this Statement to small dollar items, such as leases for copy machines and small computer equipment, that are often leased in high volume but at low per-asset cost. This policy was reviewed by the City’s outside auditors to determine if the threshold was reasonable and they were in agreement. Upon approval, this policy will be effective at the beginning of the current fiscal year, or July 1, 2021, to be in line with the implementation of GASB No. 87 for reporting purposes in the Annual Comprehensive Financial Report for the fiscal year ended June 30, 2022.
FISCAL IMPACT
There is no fiscal impact with approving the Lease Policy.
ALTERNATIVES
The Council has the following alternatives to consider:
1. Review and approve the City of Grover Beach Lease Policy; or
2. Do not approve the City of Grover Beach Lease Policy; or Staff Report: Approval of City of Grover Beach Lease Policy Page 2 June 27, 2022
3. Provide alternative direction to staff
PUBLIC NOTIFICATION
The agenda was posted in accordance with the Brown Act.
Attachments
1. Lease Policy
7/1/2021
Lease Policy
Purpose
The purpose of the Lease Policy is to establish the dollar threshold at which the City of Grover Beach (the City) accounts for leases for external financial reporting purposes.
Adoption and Review
This policy shall be reviewed periodically for recommended revisions to maintain the policy in a manner that reflects the ongoing financial goals of the City and compliance with Generally Accepted Accounting Principles. The Administrative Services Department management shall adopt and revise the policy as necessary.
Policy
In accordance with Governmental Accounting Standard Board (GASB) Statement No. 87, Leases, a lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period in an exchange or exchange-like transactions (i.e., buildings, land, vehicles, and equipment). Any contract that meets this definition should be accounted for under lease guidance as identified in GASB Statement No. 87. Subject to certain provisions and exceptions noted in the guidance, leases are generally reported as follows in a government’s external financial statements:
Lessee: A lessee should recognize a lease liability and a lease asset at commencement of the lease term. A lessee should reduce the lease liability as payments are made and recognize an outflow of resources (i.e., expense) for interest on the liability. The lessee should amortize the lease asset in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset.
Lessor: A lessor should recognize a lease receivable and a deferred inflow of resources at commencement of the lease term. A lessor should recognize interest revenue on the lease receivable and an inflow of resources in a systematic and rational manner over the term of the lease.
Effective July 1, 2021, the City has established a materiality dollar threshold for determining the inclusion or exclusion of leases in the external financial statements, both as lessee and lessor. At the commencement of the lease term, the City will analyze the terms and provisions of the lease agreement (contract) to calculate the value of the underlying asset.
Attachment 1
7/1/2021
An individual lease agreement (contract) that generates a right-to-use underlying asset value calculated at greater than or equal to $50,000 will be included in the external financial statements.
A lease agreement (contract) with an underlying asset value less than $50,000 may be included in the external financial statements at the discretion of the City Administrative Services Department management should it be determined that its exclusion might otherwise cause the financial statements to be incomplete or misleading in some manner.