A major change to how federal agencies treat leases is on the horizon. On October 1, 2023, the Statement of Federal Financial Accounting Standards (SFFAS) 54, the Federal Accounting Standards Advisory Board’s (FASAB) new Lease Accounting Standard for federal agencies goes into effect. The new approach aims to include most leases on the balance sheet for lessees and lessors, but getting ready for the change is not just an exercise for accounting. Compliance requires data and technology considerations that may demand collaboration between a wide range of agency personnel and branches.
These changes are significant, but not unprecedented. Private and public companies recently adjusted to the Financial Accounting Standards Board’s (FASB) ASC 842, a similar lease accounting standard, but limited resources might further complicate federal agencies’ compliance with SFFAS 54. Early preparation can ease the transition to SFFAS 54 and help federal agencies reap the benefits of a comprehensive lease accounting strategy.
Here are the key steps toward compliance:
1. Start while you’re ahead
Companies and nonprofits who have transitioned to the new lease accounting standards overwhelmingly report that the process took longer and was more complex than anticipated. While competing priorities and resource constraints are real, waiting until the last minute to begin the transition process will only make it more challenging. Federal agencies should take steps to begin their compliance journey now to avoid scrambling as the deadline nears. A good first step is taking a close look at the new standard to understand how your organization will be impacted. Companies reported that understanding the new standards was one of the most challenging aspects of the compliance journey, so agencies should not overlook this part of the process.
2. Understand your lease portfolio
The next step in the transition toward SFFAS 54 compliance is to understand your lease portfolio. Consider both material and immaterial assets and how branches currently track each. Identifying all your leases may not be as easy as it seems. In a recent survey, we found that 58% of private and public companies uncovered embedded leases, which can hide in contracts or other documents across an organization. Leases can fall through the cracks at any type of organization, but federal agencies may face additional challenges as disparate data and processes between agency branches is a common problem.
Compliance with SFFAS 54 is a holistic effort that requires cooperation across the agency. Assign a project point person to spearhead 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 point 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 project point person to ensure alignment and steady progress throughout the transition.
4. Consider options for streamlining the process
SFFAS 54 comes at a time when many federal agencies are also addressing backlogs caused by the COVID-19 pandemic. Compliance with SFFAS 54 is a complex, cross-departmental undertaking that must be performed in addition to the agency’s daily responsibilities. Technology solutions can help. While many agencies are currently managing leases in Excel, a 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 takes time and includes reviewing available options, conducting demos and seeking case studies from potential providers. Agencies should consider starting this process sooner rather than later. The project point person should lead this effort, but since professionals across the agency will be using the software, it’s ideal to have buy-in 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 enhance processes through technology, but the benefits go beyond checking the box on compliance. Agencies will gain a clearer view of their leases and be better positioned to renegotiate terms and assess the value of their portfolio. The future of lease accounting requires present day preparation. As SFFAS 54’s effective date draws closer, federal agencies are encouraged to begin identifying key personnel, aggregating data and optimizing processes to meet shifting requirements and reap the benefits of a proactive approach to implementation.
Sarah O’Sullivan is accounting director for LeaseQuery.