How agencies can factor in building leases better

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Federal agencies do a lot of leasing, of buildings, vehicles, and equipment. How they account for it can have a big effect on their finances. Now the Federal Accounting Standards Advisory Board has proposed several changes to how agencies account for leasing. With what they are, and the impact they might have, advisory board senior analyst Alan Perry joined Federal Drive with Tom Temin.

Interview transcript:

Tom Temin: Mr. Perry, good to have you on.

Alan Perry: Nice to be here, Tom, thank you for having me.

Tom Temin: Well, first of all, give us a sense of the range of what the government does lease.

Alan Perry: Under the new standards, a lease is defined a little bit more broadly, it’s basically a right to derive economic benefits from underlying assets that is defined to be property and equipment. But sometimes your underlying asset is property and equipment, it’s just a little bit more diverse now, I guess. So you could like maybe have grazing rights on land. And that would be a lease. Or you might be leasing land for oil and gas exploration, right now I don’t think that’s accounted for as a lease, but the time that you’re paying rent on that land, that would be considered a lease. So there’s just a few more things that federal entities are going to have to account for as a lease now. If it meets this sort of broad definition, this will be the default new standard that you’ll go to once it comes into effect.

Tom Temin: And I want to return to that because sometimes the government is the lessee, sometimes it’s the lessor in the case of those types of things. But what are you proposing?

Alan Perry: It’s basically redefining the lease. So this is something that’s happening more broadly, even in the international and US communities for accounting. So this project has been going on for several years, it even predates my time on the board staff. Under the new standard, we’re having this right to use accounting. So under the current accounting standards, a lot of this stuff is off, the financial statements are often what they call off the balance sheet. So you don’t have a lot of lease assets and lease liabilities on your balance sheet at all. It’s sort of a way to finance the use of assets without it showing up on the financial statements. Sometimes they do but not very often. So under this new model, your rights and obligations to derive these economic benefits and to pay for your rent will show up on the balance sheet, it’ll be a better way to provide a full picture of the economic substance of leases so that people can make decisions based on the financial statements.

Tom Temin: Do these apply to agencies that are leasing property from another owner, as well as to whether the government grants leases on to assets that it owns? Does it work both ways?

Alan Perry: It works both ways. The standard is sort of organized into topic areas. So there’s a lessee for when the government is leasing from private entities. There’s a little section on that. And then there’s lessor if the government is leasing to other government agencies, that’s considered an intergovernmental lease. Or if the government is leasing to another private entity, like say, for example, like on the ground floor of a government building, you might be leasing a bunch of retail space on the first floor, that would be the lessor standards.

Tom Temin: And what about those oil and gas leases that the government issues on federal land and so on, grazing rights, where the government is the lessor?

Alan Perry: I think this will be have a significant impact for folks like at the Department of the Interior, folks at GSA and the State Department because those transactions are significant, and they already show up on the books in some way. But now they’re gonna have to change that accounting. So this is a big deal in the federal financial management realm. And it should result in better information for internal and external decision making. So we’re pleased to see this happening, but it will be a heavy lift leading up to the first year.

Tom Temin: And this won’t affect, for example, the appropriated funds agencies have to spend on their programs? It sounds like an arcane accounting exercise. What’s the real effect going to be if the books have to carry certain assets that they don’t show now?

Alan Perry: That’s actually a great question. So this is what’s considered like the proprietary accounting that agencies have to release in their financial statements under the CFO Act. And there’s a couple of acts that came after that, that amended it. But the budgetary accounting for leases is actually not affected. That’s out of the board’s scope. So the budget stuff is not really effective. So there are certain budget scoring mechanisms for leases and that’s really just out of scope. So agencies will still continue to do what they’re doing now for budgetary purposes, unless OMB, the Office of Management Budget, changes that scoring model sometime in the future. I don’t think they will but they might. And your introduction to me actually reminds me, I know it’s kind of generic, but I should disclaim I am not a member of the board and everything that I say is my own opinion. I’m trying to speak for the board the best I can.

Tom Temin: You’re the guy they sent to speak so I guess live with what it is you say. But what will agencies have to do to account for this? It sounds like a major change say in the systems that they use to generate financial reports.

Alan Perry: Correct. So first of all, the significance of the effect really is just sort of wide ranging, obviously the effects on the books or the financial statements are all the same for everybody. But depending on the size of your lease portfolio, this could be a really heavy lift. Or if you’re a smaller agency, with just a handful of leases, you might be able to do all of this with sort of an advanced excel wizard to have in your accounting shop. So this is a multi year implementation effort that agencies are going through. So the General Services Administration, GSA, for example, they’ve been actively involved with the leasing projects since the beginning. And they have been preparing to implement this standard since it was issued. So it’s going to be like a five year project for them. Now, of course in year one, they’re not doing quite as much as being done in year two, three or four. But agencies like GSA, DoD, Interior, Department of State, these entities have a lot of what would meet the definition of a lease, both on the lessor and the lessee side. So these agencies will have systems changes that they’ll have to make, they’ll have to really start thinking through all the data elements that they need to capture and start developing systems requirements. So this affects a lot of people across the agency.

Tom Temin: And what is the timeline here? What’s the status of the rule change and how does that get to be finalized? And then how does it get implemented?

Alan Perry: The new standards go in effect in fiscal year 2024. So the fiscal year 2024 financial reports will show these changes. The standards are already published so what we’ve recently done is we have implementation guide out for public comment. I think there’s about 85, or 90 more days left to public comment. And the public comments are due February 5. And public comments basically includes anybody. So if you wanted to comment on it, you could. Or typically, it’ll be mostly agencies and accounting firms that respond, but there’s sometimes interested parties in the public too. And so we’re asking for public comment on this, because this is such a significant change in accounting, that the implementation guidance is rather robust. There’s almost 100 there, there’s basically 100 questions and answers. And these are very nuanced and technical questions and answers. Some of them are basic, there’s a wide range, but we really want to make sure that folks agree with everything that we have there. It’s out for an exposure draft basically. And we want to make sure that we’re not missing anything, if there’s something that we can help people with and that we didn’t cover, we want to make sure that those comment letters hit on those things. So I’m really encouraging the listeners to just basically be aware of this, if you want to go to FACAB.gov and check out the exposure draft. Make sure that the folks in your CFO shops are aware of this and actively participating. I just really encourage people to be involved. I mean, I have a taskforce of like 115 people across the federal financial management community and I’ll welcome more if folks want to join, but just keep an eye on the project. And the implementation guidance is really, as opposed to other things, the implementation guide is really geared towards the agencies, and we want to make sure that we’re helping them. So they’ll be able to digest that, we hope that to finalize that towards the end of fiscal year 2021. And then they’ll have a couple years to digest that and consider that as they’re preparing to implement in 2024.

Tom Temin: Alan Perry is senior analyst at the federal accounting standards advisory board. Thanks so much for joining me.

Alan Perry: Thank you for having me. And if anybody has any questions, just go to FASAB.gov and my contact information is up there. Y’all can feel free, I’ll always take questions and inquiries and all that stuff.

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