GASB 87 Exclusions: Short-Term, Intangible, and Supply Contracts

GASB Statement No. 87 does not apply to every arrangement that resembles a lease. The GASB 87 exclusions cover short-term leases, leases of intangible assets (including software and natural resource rights), leases of biological assets and inventory, contracts that transfer ownership without a real termination option, supply contracts, service concession arrangements under GASB 60, and leases of assets financed with outstanding conduit debt. Two further exceptions apply only on the lessor side: leases of assets held as investments and certain regulated leases. Anything that falls into one of these categories stays off the right-to-use asset and lease liability model that GASB 87 otherwise requires.¹

Short-Term Leases

The most frequently used exclusion is for short-term leases. A lease qualifies as short-term when its maximum possible term at commencement is 12 months or less, including any options to extend, regardless of whether the government expects to exercise those options.¹ This is a bright-line test. A 12-month lease with a single one-year renewal option has a maximum possible term of 24 months and does not qualify.

The “maximum possible term” assumes every extension option the government controls will be exercised and every termination option it controls will not be. For rolling month-to-month or year-to-year arrangements, the maximum possible term is the noncancelable period plus any required notice period. A three-year lease that the government can cancel after 11 months qualifies as short-term because the government holds the termination right. A six-month lease with a seven-month renewal option does not, because the total reaches 13 months.¹

Short-term leases stay off the statement of net position entirely. Payments are recognized as expense or expenditure when due. Prepayments create a prepaid asset; unpaid rent creates a liability. No expense is recognized during a free-rent period.¹ The notes to the financial statements must still disclose total short-term lease expense for the reporting period.²

Leases of Intangible Assets

Leases of intangible assets fall outside GASB 87. The standard specifically names rights to explore for or exploit natural resources such as oil, gas, and minerals; licensing contracts for films, video recordings, manuscripts, patents, and copyrights; and licensing contracts for computer software.¹ These arrangements are covered by other guidance, including GASB Statement No. 51 for traditional intangibles and GASB Statement No. 96 for subscription-based information technology arrangements like cloud computing contracts.³

One important carve-back applies to subleases. When a government originally leases a tangible asset and then subleases the right to use that asset, the intangible right-to-use asset created by the original lease stays within GASB 87’s scope. That keeps a sublease of leased office space, for example, inside the standard even though the item being subleased is technically an intangible right rather than the underlying building.¹

Biological Assets and Inventory

Leases of biological assets, including timber, living plants, and living animals, are excluded. So are leases of inventory.¹ A government that leases grazing rights or timber harvesting rights on public land accounts for the arrangement under other governmental accounting principles rather than recognizing a right-to-use asset and lease liability.

Contracts That Transfer Ownership

A contract that transfers ownership of the underlying asset to the government by the end of the term is excluded from GASB 87 if it contains no termination option other than a fiscal funding or cancellation clause that is not reasonably certain to be exercised. The government treats the arrangement as a financed purchase, recording the asset and the corresponding debt obligation immediately.¹

The classification affects both the balance sheet and the pattern of expense over the asset’s life. A financed purchase capitalizes the asset at full value and depreciates it like any other capital asset. A GASB 87 right-to-use asset is amortized over the shorter of the lease term or the asset’s useful life. Getting this wrong distorts both figures.

Supply Contracts

Supply contracts are excluded because they deliver the output of an asset rather than control over the asset itself. Power purchase agreements are the most common public-sector example.¹ A government that contracts for a set quantity of electricity does not control the generating plant. The vendor decides which units to run, how to maintain them, and when to dispatch power. The government receives kilowatt-hours, not the right to operate specific turbines.

The same reasoning applies to managed print contracts, data center hosting arrangements, and similar deals where the government pays for a volume of service. The test is control: does the government direct how the asset is used, or does the vendor?

Service Concession Arrangements

Agreements that meet the definition of a service concession arrangement under GASB Statement No. 60 are excluded from GASB 87.¹ In a typical service concession, a government grants a private operator the right to operate a public asset such as a toll road, parking garage, or convention center, and to collect user fees over a defined period. The operator usually commits to maintaining or improving the asset in return. These arrangements have their own accounting model because the government retains ownership and significant control over the public purpose the asset serves.

Leases Financed with Conduit Debt

A lease is excluded from GASB 87 when the underlying asset is financed with outstanding conduit debt, unless the lessor reports both the asset and the conduit debt on its own financial statements.¹ Conduit debt is issued by a government on behalf of a private entity that is responsible for repayment. Layering GASB 87 lease accounting on top of an existing conduit debt arrangement would produce duplicative reporting. The exclusion only applies while the conduit debt remains outstanding.

Lessor-Only Exceptions

Two exceptions apply only on the lessor side. The arrangement is not removed from GASB 87 entirely; the lessee still follows the standard’s normal recognition and measurement rules. The lessor, however, gets different treatment.

Leases of Assets Held as Investments

Paragraph 41 of GASB 87 excludes leases of assets that are investments from the lessor’s recognition and measurement requirements.¹ When a government holds real estate or other assets primarily as investments rather than for governmental purposes, the lessor’s normal lease receivable and deferred inflow model does not apply. The investment accounting framework already captures the economic substance.

Certain Regulated Leases

Lessors also get an exception for certain regulated leases.² This applies when an external body, such as a federal or state regulatory agency, dictates the pricing structure of the lease. Airport gate agreements and port authority leases with federally mandated fee structures are common examples. When the lessor cannot determine the nature and amount of lease payments because an outside regulator sets the terms, normal lessor accounting does not fit. The lessee side still applies GASB 87 in the ordinary way.

Leases Between Blended Component Units and the Primary Government

Not an exclusion in the same sense as the categories above, but worth flagging because it is easy to assume otherwise: when the lessee or lessor is a blended component unit of the primary government, GASB 87’s normal recognition requirements do not apply. The lessor’s capital assets and related debt are reported as if they belonged to the primary government directly, and eliminations happen before the blended component unit’s statements are combined with the primary government’s.¹

Lease arrangements between the primary government and discretely presented component units follow the standard’s normal rules. The distinction reflects how tightly the entities are integrated: applying lease accounting between a primary government and its blended component units would create artificial assets and liabilities that do not reflect real economic obligations, while discretely presented component units operate with enough independence that the lease framework captures a genuine transaction.¹

1
Governmental Accounting Standards Board. Statement No. 87 – Leases
2
Governmental Accounting Standards Board. Summary – Statement No. 87
3
Governmental Accounting Standards Board. Summary – Statement No. 96