What federal agencies need to know now about the new lease accounting standard

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A major change in how federal agencies process leases is on the horizon. On October 1, 2023, Statement of Federal Financial Accounting Standards (SFFAS) 54, the new Federal Accounting Standards Advisory Board (FASAB) lease accounting standard for federal agencies, becomes effective. The new approach aims to include most leases on the balance sheet for tenants and lessors, but preparing for the change is not just an accounting exercise. Compliance requires data…

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A major change in how federal agencies process leases is on the horizon. On October 1, 2023, Statement of Federal Financial Accounting Standards (SFFAS) 54, the new Federal Accounting Standards Advisory Board (FASAB) lease accounting standard for federal agencies, becomes effective. The new approach aims to include most leases on the balance sheet for tenants and lessors, but preparing for the change is not just an accounting exercise. Compliance requires data and technology considerations that may require collaboration across a wide range of agency staff and branches.

These changes are significant, but not unprecedented. Private and public companies have recently adapted to the Financial Accounting Standards Board (FASB) ASC 842, a similar standard for accounting for leases, but limited resources could make it more difficult for federal agencies to comply with SFFAS 54. Early preparation can ease the transition to SFFAS 54 and help federal government agencies reap the benefits of a comprehensive lease accounting strategy.

Here are the key steps towards compliance:

1. Start while you’re ahead

Businesses and nonprofits that transitioned to the new lease accounting standards overwhelmingly report that the process took longer and was more complex than expected. While competing priorities and resource constraints are real, waiting until the last minute to begin the transition process will only make it more difficult. Federal agencies should take steps to begin their compliance journey now to avoid rushing as the deadline approaches. A good first step is to take a close look at the new normal to understand how your organization will be impacted. Companies have indicated that understanding the new standards is one of the most challenging parts of the compliance journey, so agencies shouldn’t overlook this part of the process.

2. Understand your lease portfolio

The next step in the transition to SFFAS 54 compliance is to understand your lease portfolio. Consider tangible and intangible assets and how branches currently track them. Identifying all of your leases may not be as simple as it seems. In a recent survey, we found that 58% of private and public companies discovered embedded leases, which may be hidden in contracts or other documents within an organization. Leases can slip through the cracks in any type of organization, but federal agencies can face additional challenges as disparate data and processes between agencies are a common problem.

3. Coordinate to collaborate

SFFAS 54 compliance is a holistic effort that requires cooperation across the agency. Assign a project contact to lead the transition process. This person is responsible for communicating with stakeholders from different branches and evaluating various tools and strategies for effective compliance. In addition to selecting a resource person, it is important to identify a member of each relevant department within the agency to assist with implementation. This team will attend meetings regarding SFFAS 54 compliance as well as collect and provide branch data requested by the person responsible for the project to ensure alignment and steady progress throughout the transition.

4. Consider options to streamline the process

SFFAS 54 comes at a time when many federal agencies are also processing backlogs caused by the COVID-19 pandemic. SFFAS 54 compliance is a complex, cross-departmental undertaking that must be performed in addition to day-to-day agency responsibilities. Technological solutions can help. While many agencies currently manage leases in Excel, cloud-based software can help streamline the process, mitigate risk, and minimize time spent during the transition and on an ongoing basis in the future. Selecting a software vendor is time-consuming and includes reviewing available options, conducting demos, and researching case studies from potential vendors. Agencies should consider starting this process as soon as possible. The person responsible for the project should lead this effort, but since agency professionals will be using the software, it is ideal to have buy-in from across the organization.

Benefits beyond compliance

Engaging in the SFFAS 54 compliance process requires federal agencies to organize and optimize data, establish clear internal communication channels, and improve processes through technology, but the benefits go beyond the checkbox on conformity. Agencies will have a clearer view of their leases and will be better placed to renegotiate terms and assess the value of their portfolio. The future of lease accounting requires current preparation. As the effective date of SFFAS 54 approaches, federal agencies are encouraged to begin identifying key personnel, aggregating data, and optimizing processes to meet changing requirements and reap the benefits of an approach proactive in implementation.

Sarah O’Sullivan is Accounting Director of LeaseQuery.

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