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**SFFAS 54 LEASE GUIDANCE:**

**RIGHT-TO-USE LEASES:**

**DEEMED “CAPITAL LEASES” FOR BUDGETARY TREATMENT**

**EFFECTIVE FISCAL YEAR 2024**

**PREPARED BY:**

**GENERAL LEDGER AND ADVISORY BRANCH**

**BUREAU OF THE FISCAL SERVICE**

**U.S. DEPARTMENT OF THE TREASURY**

**RIGHT-TO-USE LEASES GUIDANCE: BUDGETARY CAPITAL**

**Effective Fiscal 2024**

Page 40 of 41                                                                                  November 2022

**Background: Proprietary Requirements**

SFFAS No. 54, *Leases*, as amended by SFFAS No. 58 and SFFAS No. 60, replaces proprietary lease accounting and disclosure standards for general purpose federal financial reports. SFFAS No. 54 is effective for reporting periods beginning after September 30, 2023. (Early implementation is not permitted.)

A lease is defined as “a contract or agreement whereby one entity (lessor) conveys the right to control the use of PP&E (the underlying asset) to another entity (lessee) for a period of time as specified in the contract or agreement in exchange for consideration.” (SFFAS 54, Par. 6.)  SFFAS No. 54 requires that federal lessees recognize a lease liability and a right-to-use lease asset (also referred to as a lease asset), and that federal lessors recognize a lease receivable and unearned revenues at the commencement of the lease term, unless the lease meets the definitional criteria of a short-term lease, contract or agreement that transfers ownership, or an intra-governmental lease.

At the commencement of the lease term, the lessee should recognize a lease liability and a right-to-use lease asset, while the lessor should recognize a lease receivable and unearned revenue.

**Calculating the Lease Asset/Lease Liability Amounts: Fixed vs. Variable Payments**

The Lessee’s lease asset and the Lessor’s lease liability should include the present value of payments expected to be made during the lease term.  Generally, these should include:

· Fixed payments;

· Variable payments that depend on an index or a rate;

· Variable payments that are fixed in-substance; and

· Any lease incentives receivable from the lessor.

For a complete list of payment types to include in the present value of payments, please see SFFAS 54, Paragraphs 40 and 56. (SFFAS 54, Par. 49 also identifies costs that are to be capitalized as part of Lessor’s lease asset that are not components of a Lessee’s lease liability.)

Variable payments based on future performance of the lessee or usage of the underlying asset should be recognized as lease expense/revenue during the reporting period to which those payments relate.  These variable payments should not be included in the measurement of the lease receivable/lease liability.  (See SFFAS 54, Pars. 41 and 54.)  Reporting entity management should consult with appropriate procurement officials, and use professional judgment, to make determinations on what payments are fixed and what are variable for proprietary lease accounting purposes.

**Amortization of Discount on Lease Liability/Receivable - Interest Expense/Revenue**

In subsequent financial reporting periods, the lessee should calculate the amortization of the discount on the lease liability and recognize that amount as interest expense for the period. Any payments made should be allocated first to the accrued interest liability and then to the lease liability. (SFFAS 54, Par. 43) Likewise, the lessor should calculate the amortization of the discount on the receivable and report that amount as interest revenue for the period. Any payments received should be allocated first to the accrued interest receivable and then to the lease receivable. (SFFAS 54, Par. 60)  

**Lease Amortization**

During the lease term, the Lessee’s lease asset should be amortized in a systematic and rational manner, over the shorter of: The lease term; or the useful life of the underlying asset.  Meanwhile, the Lessor should amortize the unearned revenue to lease revenue in a systematic and rational manner over the term of the lease.  (SFFAS 54, Par. 65)

**Background: Budgetary Requirements**

While proprietary accounting requirements for leases are transformed by SFFAS 54, *Leases*, budgetary accounting requirements will remain unchanged and continue to be guided by the lease scorekeeping rule developed by OMB, CBO, and the House and Senate Budget Committees originally in connection with the Budget Enforcement Act of 1990, and guidance regarding this rule provided in *OMB Circular No. A-11, Appendix B,**Budgetary Treatment Of Lease-Purchases and Leases of Capital Assets.*

**Operating/Capital/Lease Purchase**

Reporting entities should apply professional judgment, consistent with the guidance in Appendix B of *OMB Circular No. A-11*, on Operating Leases/Capital Leases criteria to discern the correct budgetary treatment of each lease contract.  Budget Authority for Capital Leases should be recorded up-front in an amount equal to the “asset cost,” as defined in Appendix B.  Meanwhile, outlays of Capital Leases are scored over the lease term in an amount equal to the annual lease and other contractually required payments.      

“Amounts. The up-front budget authority required for both lease-purchases and capital leases is called the asset cost. This equals the present value of the minimum lease and other contractually required payments excluding payments for identifiable annual operating expenses that would be paid by the Government as owner, such as utilities, minor maintenance, and insurance. Property taxes will not be considered to be an operating expense and will be included in the calculation of the up-front budget authority. (See section 3 for the treatment of property taxes for purposes of distinguishing operating leases from capital leases.) Other contractually required payments include any and all costs related to the asset being leased in addition to the rent fee applied under the lease.

For example, other contractually required payments would include all costs under triple net or other unique arrangements. The present value of the lease and other contractually required payments is discounted as of the date of the first payment (or the beginning of the lease term, whichever is earlier) using the appropriate interest rate (see section 4 for a more detailed explanation and the treatment of multiple deliveries).”

**Key Assumptions Driving Proprietary Accounting Entries:**

**Lease Term**

· A federal reporting entity (Lessee) signs a 5-year lease with a non-federal entity (Lessor) for the right to control/right to use equipment.  (For illustration purposes, the scenario also shows posting logic under a separate heading for a federal Lessor working with a non-federal Lessee.)

· The Lessor already has equipment on its Balance Sheet valued at $300,000 with $150,000 Accumulated Depreciation.

· The Present Value of all expected fixed payments is $100,000.  The Lessor charges the Lessee the Treasury Rate of 10.00%. 

· No purchase option probable of being exercised exists.

**Fixed & Variable Payments**

· Management determines the lease contains only fixed payments.  Fixed payments include a minimum annual payment required by the lease contract, and lease payments (including interest) are paid at the start of the year.  

· Management determines there are no variable payments based on lessee performance or future usage of the underlying asset in the contract, per SFFAS 54, Par. 41. (Also See Technical Release 20, Lease Implementation Guidance, Par. 48 for more information on Variable Payments.)

· Management determines that the fixed lease payments are “contractually required payments" per *OMB Circular A-11, Appendix B*.

**Key Assumptions Driving Budgetary Accounting Entries:**

**Budgetary Authority**

· The Lessee received a direct appropriation and is working from a multi-year appropriated TAFS from a general fund expenditure account.  Agency management has concluded that appropriations language allows the budget authority to remain available for the lease and other contractually required payments over the full term of the lease.

· It is the responsibility of agencies to determine the correct discount rate and do their own calculations when determining budget authority for capital leases.  Per *OMB Circular No. A-11, Appendix B*, all assumptions required to perform the lease analysis are subject to OMB approval. (The differential cost of financing has to be paid upfront by the agency as part of their asset cost calculation.)  

· Management determines that the fixed payments are "contractually required payments" per *OMB Circular A-11, Appendix B*.

· Note – For budgetary purposes, agencies will need to develop amortization tables to calculate the asset cost of capital leases.

**Budgetary Lease Capital/Operating Determination**

· Management determines the lease to be a “**Capital lease**” for budgetary purposes. Therefore, the asset cost (up-front budget authority required) is the present value of the minimum lease and other contractually required payments.  (Note that the differential cost of financing has to be paid upfront by the agency as part of their asset cost calculation.)

· Additional budget authority equal to the cost of financing (imputed interest cost) is recorded on an annual basis over the lease term.  Imputed interest cost is calculated pursuant to the guidance in *OMB Circular No. A-11*, Appendix B using the Treasury interest rates published in the most recent update to Appendix C of *OMB Circular No. A-94*.  It is equal to the difference between the minimum lease and other contractually required payments under the full term of the lease and the estimated net present value of those payments (asset cost) that is recorded upfront. For this example, assume the appropriate discount rate is 10.0%.

· There are no other payments for identifiable annual operating expenses (utilities, minor maintenance, and insurance, etc.)

**Budgetary Outlays**

· Outlays are scored annually equal to the annual lease and contractually required payments.  Over the life of the lease: 

· Outlays for the asset cost comes from the balances obligated when the lease agreement was signed; and

· Outlays for the imputed interest cost comes from new budget authority.

**Cancellation Clauses**

· The lease does not contain renewal/purchase options or cancellation clauses, and is not associated with government land.

**Listing of USSGL Accounts Used in This Scenario:**

**Proprietary Amortization Table (PV of Payments = $100,000; Treasury Interest Rate of 10.0%)**

**FISCAL YEAR 1**

**Lessee Accounting**

**Lessor Accounting**

**Fiscal Year 1 Post-Closing Adjusted Trial Balance:**

**FISCAL YEAR 2**

**Lessee Accounting**

**Lessor Accounting**

**Fiscal Year 2 Post-Closing Adjusted Trial Balance:**

**FISCAL YEAR 3**

**Lessee Accounting**

**Lessor Accounting**

**Fiscal Year 3 Pre-Closing Trial Balance:**

**Fiscal Year 3 Post-Closing Trial Balance:**

**Financial Statements:**

**Reclassified Financial Statements:**

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