GASB 87 provides a new framework for accounting for leases under the principle that leases are financings. No longer will leases be classified between capital and operating. Lessees will recognize an intangible asset and a corresponding liability . The liability will be based on the payments expected to be paid over the lease term, which includes an evaluation of the likelihood of exercising renewal or termination options in the lease.

City of El Paso decided to implement early adoption in 2019. It just sign 3 years lease for an office building with a remaining Economic life of 20 years. The building has a fair market value of $555,018 million. Based on an interest rate of 4 percent, annual lease payments are set at $200,000, the amount required to liquidate a $555,018 million, 3 year, 4 percent loan in equal annual installments.

The Interest expense calculated under the Effective Interest Rate Method will be reported higher or lower at Year 2 comparing to Y 1

		Higher than the amount reported in Year 1
		Lower than the amount reported in Year 1
		Same
		Can't be determined