With SFFAS 54, Leases, effective for fiscal years beginning on or after October 1, 2023, federal agencies should be considering their implementation process. Once agencies have identified key stakeholders and their complete lease populations, Cherry Bekaert’s third suggested step in the process is to develop policies and procedures and identify systems.
Danny Martinez, Government & Public Sector (GPS) Accounting Advisory Lead, sat down with Jack McKee, Manager in GPS, to discuss these third of four steps that federal agencies should follow.
Part of our GPS podcast series, and the third in our mini-series on SFFAS 54, Leases, this episode covers the:
- Importance of assessing current state of policies and procedures
- Identification of what needs to be updated in policies and procedures
- Impact on chart of accounts and lease capture
- New policy and procedures considerations due to SFFAS 54
- Best practices for phase three of SFFAS 54 implementation
If you have any questions specific to your business needs, Cherry Bekaert’s Government & Public Sector team is available to discuss your situation with you.
Related Insights:
- Podcast: Initial SFFAS 54 Implementation Considerations for Federal Agencies
- Podcast: Identifying Complete Leasing Populations for SFFAS 54 Implementation
- Article: SFFAS 54, Leases Is Coming: What Should Your Federal Agency Do About It Today?
- Webinar: Introduction to the Federal Leasing Standard SFFAS 54
View All Government & Public Sector Podcasts
DANNY MARTINEZ: Welcome back to Cherry Bekaert's Government and Public Sector Podcast Series. This is the third in our miniseries about Statement 54 leases. Please check out the first two parts of the series, where we discussed the standard, how to engage others within your organization on an implementation team, and completeness of your leasing population, including embedded leases.
DANNY MARTINEZ: I'm your host, Danny Martinez. I'm the government and public sector accounting advisory lead. I lead the firm's federal and state and local accounting advisory projects, including implementation of new standards such as the federal leasing standard.
DANNY MARTINEZ: With me today is Jack McKee. Jack, please introduce yourself.
JACK MCKEE: Hi, Danny. Thanks for having me. My name is Jack McKee. I'm an advisory manager in the government and public sector group here at Cherry Bekaert.
JACK MCKEE: Our group specializes in financial statement preparation, audit preparation, technical accounting challenges, and the implementation of new standards, including Statement 54.
DANNY MARTINEZ: We've reached a point where we feel confident about completeness of our leasing population. We've gathered and documented the leases.
DANNY MARTINEZ: Why can't we jump straight to the journal entries? In our four-phase implementation process, the third step addresses policies and procedures. Jack, can you explain what we'll be doing in this third step?
JACK MCKEE: The goal is to focus on two areas of your policies and procedures. First, assess the current state: how are you identifying and tracking leases today?
JACK MCKEE: Second, based on your current practices, determine what needs to change going forward to update policies and procedures and make the process smoother beyond the initial year of implementation.
DANNY MARTINEZ: When you say current state, what types of policies and procedures are you seeing that need to be updated in our implementation projects?
JACK MCKEE: Several areas. First, who has authority to enter into leases? Review whether that authority level should change and whether there should be a notification mechanism to ensure accounting is informed when leases are entered into.
JACK MCKEE: Second, how are leases being captured? As leases come in, how are they logged, recorded, and tracked on a go-forward basis?
JACK MCKEE: Third, updates to the chart of accounts. Do you have the accounts you need in your general ledger? The main accounts typically needed are a right-of-use asset, a lease liability, lease receivable, and unearned revenue. Review and update the chart of accounts in preparation for implementation.
DANNY MARTINEZ: Adding to that, many organizations discover that different departments or sub-departments can enter into long-term leasing commitments without accounting's knowledge. Use Statement 54 to reassess whether that level of authority is appropriate or whether authority should be more centralized.
DANNY MARTINEZ: There are also items not previously contemplated that should be addressed in future-state policies. One is lease materiality. When you put leases on the books and gross them up in the ledger, determine the materiality threshold not only for individual leases but for the aggregate of leases below that threshold.
DANNY MARTINEZ: The other is discount rate. The federal leasing standard references using the agency's incremental borrowing rate, which would be the Department of the Treasury borrowing rate for securities. Make sure your policies address the discount rate to use.
DANNY MARTINEZ: Jack, what other future-state policies and procedures should we be looking out for?
JACK MCKEE: A few additional items. First, lease options—options to extend or terminate a lease—and how you determine whether those options are probable, meaning more likely than not (greater than 50%). Having a policy and procedure for evaluating options is important because they significantly affect lease liabilities and lease terms.
JACK MCKEE: Second, intergovernmental leases. While intergovernmental leases may be excluded from balance sheet presentation under the new standard, you must segregate this part of the lease population and maintain the information for required note disclosures. You will need lease terms, lease expense, and asset categories for those disclosures.
JACK MCKEE: Third, short-term leases. Any lease with a term of 24 months or less as of the implementation date can be excluded from the balance sheet. Document how you evaluate and document that determination and the process for segregating and excluding short-term leases.
JACK MCKEE: Fourth, lease modifications and impairments. Define how modifications will be reviewed and when a remeasurement is required, including the process to track remeasurements going forward to ensure correct accounting.
JACK MCKEE: Finally, remember that leased assets placed on the books will be subject to impairment considerations under Statement 44 for property, plant, and equipment. Establish a process to evaluate impairment on a periodic basis, similar to other capital assets.
DANNY MARTINEZ: That was a thorough explanation of current- and future-state items that need to be considered. That helps explain why the third phase is so important.
DANNY MARTINEZ: I ask all our guests one question: many federal entities are about to embark on this lease implementation journey. What words of wisdom do you have based on what you've seen with other governments that would help them be better prepared?
JACK MCKEE: Allow time to compile all known leases and make information available to everyone involved. Translate technical accounting language into checklists or resources for anyone who can enter into a lease contract so you can cast a wide net and capture the full lease population.
JACK MCKEE: As you compile leases, document the procedures you used to ensure completeness and to support your conclusions. Document processes for intergovernmental leases, short-term leases, and contracts reviewed that were determined not to be leases.
JACK MCKEE: Thorough documentation will be critical because completeness is one of the biggest audit risks associated with this implementation.
DANNY MARTINEZ: Thank you, Jack, for joining and sharing your knowledge. If you want to discuss your federal implementation and how Cherry Bekaert can assist, you can reach me at danny.martinez at cbh.com.
DANNY MARTINEZ: You can reach Jack at jack.mckee, M-C-K-E-E, at cbh.com. You can also find both of us on LinkedIn.
DANNY MARTINEZ: Please subscribe to our podcast. Listen to the two other phases we've already published, and be on the lookout for the final phase of the podcast, where we will complete the Statement 54 implementation roadmap.
