Question: Leasing Analysis and Memorandum
Project Description: For this assignment, 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, 2017, 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 12-31-17
$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.
Graded Assignment: Determine what amounts in the county's financial statements would change if the proposed standards had been in effect as of 12-31-17, and what the new amounts would be. Be sure to show your relevant work.
Part 2: Prepare the memorandum to the County Executive, which should be double spaced (12 point font, 1-inch margins on all sides) and no more than five pages long. The memorandum should include four sections:
• Introduction-an explanation of the purpose of the memorandum and an overview of its contents
• Background-a brief description of the new lease standards, focusing on the elements that you believe will have the greatest impact on the county
• Analysis-a summary of what you found in your analysis of the impact on the financial statements and your evaluation of the policy implications for the county including but not limited to:
- The public perception of the county's financial health
- Budget considerations
- Ability to borrow
- Compliance with finance-related legal and contractual requirements
• Conclusion-including any recommendations you might have regarding actions the county should consider to address the concerns you raise.