SFFAS 54, Leases Is Coming: What Should Your Federal Agency Do About It Today?
The New FASAB Lease Accounting Standard for Federal Organizations (SFFAS 54)
SFFAS 54, Leases, drastically changes the way leasing transactions will be accounted for by federal agencies. The new leasing standard is effective for fiscal years beginning on or after October 1, 2023. The new reporting will result in a significant number of federal agency lessee and lessor transactions being reported on the balance sheet. As the ability to enter leasing transactions can be spread throughout branches and departments, this accounting change will require high-level communication throughout the organization.
A lease is defined as a “contract where one entity conveys the right to control the use of an underlying asset to another entity for a specified period of time in exchange for consideration.” This leasing standard applies to both lessee and lessor transactions. A lessee transaction will result in a lease liability and a right to use an asset being reported on the balance sheet, while a lessor transaction will result in a lease receivable and an unearned revenue.
There are many nuances to the standard, including assessing the agencies incremental borrowing rate, determining reasonable certainty of options to extend or terminate, fixed versus variable payments and if the lease meets the definition of a short-term lease, to name a few. We will have additional articles digging into these nuances in the coming months.
So, What Should You be Doing to Get Ready Now?
Luckily, federal governments don’t have to start from scratch. The implementation of the federal leasing standard is very similar to the process utilized to implement the FASB and GASB versions of the leasing standard. During the implementation of those standards, Cherry Bekaert has developed a four-phase methodology for implementation.
Step-by-Step SFFAS 54 Implementation Guide
Step 1: Gain an Understanding of SFFAS 54 and Identify Key Stakeholders
- Obtain training on SFFAS 54, Leases
- Meet within the organization to determine lease exposure
- Designate an implementation team to lead the organization
Listen to our full explanation of step one via podcast
Step 2: Identify Complete Lease Population
- Compile known leases within the organization
- Provide checklists and guidance to areas in the organization with the ability to enter leasing transactions
- Search for embedded leases
- Use data analytics or other methods to scan general ledger for potential leasing transactions
- Collect all leasing arrangements with information relevant to SFFAS 54 compliance
- Document procedures taken to ensure completeness of leasing population
Listen to our full explanation of step two via podcast
Step 3: Develop Policies and Procedures and Identify Systems
- Update organization policies and procedures for leasing transactions
- Identify a software solution or other method to perform calculations necessary for SFFAS 54 compliance
- Add new necessary accounts to the organization’s general ledger to report leasing transactions
Listen to our full explanation of step three via podcast
Step 4: Reporting, Disclosure and Go Forward
- Input leasing information into software solution or other method used to perform calculations
- Create journal entries for both implementation and the first year of activity
- Add required financial statement line items and note disclosures to report
- Present results and go-forward policies and procedures around leasing transactions to all stakeholders
Cherry Bekaert is Here to Help You Navigate and Implement This Complex New Lease Standard (SFFAS 54)
With an implementation this complex, you want to start early to allow time for the inevitable bumps in the road. Your agency does not want to be in the company of the majority of entities that implemented the FASB and GASB versions of the standard and reported it took more time to implement than budgeted. Our Cherry Bekaert Government and Public Sector Accounting Advisory Team and is ready to help and provides a tailored solution for SFFAS 54 implementation based on each federal agency’s needs.
- Webinar | Introduction to the Federal Leasing Standard SFFAS 54
- Podcast | Initial SFFAS 54 Implementation Considerations for Federal Agencies
- Podcast | Identifying Complete Leasing Populations for SFFAS 54 Implementation