How to implement SFFAS 54 federal leasing standards

While some finance professionals have already started the SFFAS 54 implementation process, others might have elected to wait. However, the Oct.1, 2023, implementation date is already well behind us.

Finance professionals can take time now to understand SFFAS 54, ask federal government consultants pressing questions, and determine what the implementation process might require within the framework of their operations. Some federal entities could benefit from early collaboration with their internal auditors and FASAB.

The spectrum of federal entities required to implement the new federal leasing standards is wide ranging. The size of an entity, its internal processes, and the current state of its technology can all affect implementation.

It is important for federal entities to accurately capture the right set of lease populations to be considered under SFFAS 54, but that’s not all.

In addition to identifying a complete lease population, finance professionals should provide adequate evidence supporting that the federal entity has determined a complete population. Such diligence can help avoid material misstatement or leaving leases unaccounted for. Additionally, finance professionals will need to carefully consider details within the lease terms while documenting key decisions and how they were made.

It’s not easy to compile a complete lease population and the required documentation that goes with it. A federal entity’s finance department might need to collaborate with procurement, technology, and legal teams in new ways to effectively gather and organize all the lease agreements digitally.

In some cases, a federal entity might choose to procure a new software vendor to aid in its SFFAS 54 implementation. Other federal entities might opt to build on their existing technology assets. The decision depends on whether the current enterprise platform can handle the new demands of the updated federal leasing standards.

Increasing reporting accuracy while decreasing manual workload is the goal when new or enhanced technology is needed. For some federal entities, automation might be the way to get there.

While working through SFFAS 54 implementation, federal entities should develop internal processes to help maintain compliance with the new standard. Points of collaboration can be especially fruitful opportunities for new ways of conducting operations. For instance, finance teams can consider what processes should be in place for the procurement team to notify the legal team that new federal leases might be entered into.

Establishing and implementing new or improved internal controls is another key opportunity for positive change that can be worked through during SFFAS 54 implementation.

Embedded leases are leases contained within larger contracts or arrangements. Determining a federal entity’s embedded leases could be one of the more labor-intensive activities connected with SFFAS 54 because they could exist in a wide variety of agreements, especially service agreements.

The good news is that although SFFAS 54 is effective for reporting periods beginning after Sept. 30, 2023, an accommodation has been made for embedded leases. Assuming the criteria is met, which requires the agreements’ primary purpose to be attributed to nonlease components, any embedded leases existing as of Oct. 1, 2023, or entered into during the accommodation period which may last through Sept. 30, 2026, should be accounted for as nonleases for their remaining term. Federal entities have the option to begin accounting for these embedded leases in accordance with SFFAS 54 in 2024, 2025, or 2026. For embedded leases entered into after the selected accommodation period ends, entities should account for the lease and nonlease components as separate contracts or agreements.