FASAB Lease Standards Implementation: Tips and Strategies

The Federal Accounting Standards Advisory Board (FASAB) delayed implementation of Statement of Federal Financial Accounting Standards (SFFAS) 54, Leases: An Amendment of SFFAS 5, Accounting for Liabilities of the Federal Government and SFFAS 6, Accounting for Property, Plant, and Equipment, to fiscal year 2024 because of its complex implementation challenges, costs, and constraints faced by reporting entities. 

SFFAS 54 and related amendments provide a comprehensive set of lease accounting standards to recognize federal lease activities in the reporting entity’s financial statements and include appropriate disclosures. Despite the deferral, federal agencies should not delay preparatory work for implementation, as the standards are complex and will require thoughtful planning for effective and timely execution

Impacts on federal agencies

Complex new standards will affect most federal agencies because they bring on the balance sheet leases previously considered to be operating leases and reported mainly on the statement of net cost. This will require significant implementation efforts by the accounting and reporting offices of federal agencies, including a full integration of internal controls and associated risk assessments. The General Services Administration (GSA) may well be the most impacted federal agency. 

The GSA anticipates that the assets on its balance sheet will increase by more than 100% and its unfunded liabilities will increase by more than 250% as it brings on more than 6,000 leases previously treated as operating leases. Consequently, the implementation of this standard will significantly change the composition of GSA’s financial statements and the accompanying footnote disclosures. 

Steps to prepare for implementation

Federal agencies can be proactive. Consider the following immediate steps to prepare for the implementation of these standards:

1. Organizational structure — If you have significant lease transactions, identify the organizational structure and leadership necessary for implementing the new standard, considering the size of the organization, operating locations, and the degree of records centralization (remembering foreign operating locations). 
2. Contracting office — Contracts, agreements, and related amendments are the first input in the lease cycle, and contracting officers are the process forerunners. Give special attention to service contracts, as these may contain embedded leases when they provide equipment and tools. As such, it’s important to coordinate with the contracting, accounting, and reporting teams. 
3. Intragovernmental counterparties — Although the reporting requirements for intragovernmental leases are substantially less than leases with nonfederal entities, it is important to identify points of contact at the other federal agency for information sharing to confirm similar treatment and minimization of intragovernmental reconciliation differences. 
4. Budgeting for implementation needs — As an agency leader, assess the resources needed for SFFAS 54 implementation and related costs to budget accordingly.
5. Information systems — Evaluate whether a software solution is necessary for the task at hand. The development of the request for proposals is crucial.
6. Policy and process development — Establish policies, procedures, practices, and internal controls related to accounting and reporting for leases well in advance of the implementation year. This includes processes for both the initial implementation and post-implementation, which addresses lease renewals, modifications, terminations, abandonment, impairment, and other triggering events. Also, consider the requirements of other accounting standards (e.g., disclosure of contingent liabilities). 
7. Agency financial report or performance and accountability report — Depending on an agency’s number of lease contracts and agreements, the adoption of lease accounting pronouncements may significantly change the agency’s financial statements and accompanying footnote disclosures, key metrics, performance measures, and ratios.
8. Audit implications — Keep in mind the effect that the new standards implementation will have on the financial statements audit. Engage in early dialogue with your auditors related to the implementation of SFFAS 54 and its impact on audit timing, materiality, scope, internal control testing, and substantive audit procedures.
9. Personnel training — Initiate agency-wide personnel training immediately to create awareness of the requirements under the new lease standards, and continue training as new processes and controls are implemented.

Plan for the future

Develop a comprehensive process that looks not only at the first day of implementation of the new standards, but also at how the process works going forward. This is a complex and challenging undertaking that requires the coordinated involvement of many departments.

How we can help

CLA’s federal government team can help you stay ahead of new lease accounting standards with our tailored lease accounting assistance. We can come alongside you as you prepare for the new lease standard and beyond, from helping to identify leases and key terms to providing guidance on developing policies, preparing lease asset schedules, understanding software needs, training personnel, and more.  

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