SFFAS 54 Leases: Discount Rate, Remeasurement, and Disclosures

SFFAS 54 is the federal lease accounting standard that requires agencies to record nearly every qualifying lease as a right-to-use asset and a corresponding liability on their financial statements. Issued by the Federal Accounting Standards Advisory Board (FASAB), it took effect for fiscal years beginning after September 30, 2023, following a three-year deferral from the original 2020 date.¹ Early adoption was not permitted. The practical result: multi-year office space, warehouse, vehicle, and equipment commitments that used to sit in footnotes now sit on the balance sheet.

What Lessees Have To Record

At the start of the lease term, a lessee records two things: a lease liability equal to the present value of expected payments, and a right-to-use lease asset equal to that liability plus any payments made at or before the commencement date.²

The lease asset amortizes straight-line over the shorter of the lease term or the useful life of the underlying asset. The lease liability winds down as payments are made, with interest expense recognized along the way.

The components that feed into the liability calculation are set out in paragraph 40 of the standard: fixed payments, variable payments tied to an index or rate (measured using the index value at commencement), in-substance fixed payments, residual value guarantees the lessee is probable of owing, purchase option prices where exercise is probable, termination penalties where the lease term reflects early termination, and lease incentives receivable from the lessor, which reduce the liability.³

What Counts as a Lease

SFFAS 54 defines a lease as a contract in which one entity conveys the right to control the use of property, plant, and equipment to another for a specified period in exchange for consideration.³ The standard covers tangible assets: office and warehouse space, land, vehicles, and equipment.

Pure service contracts are outside the scope. A contract that engages a contractor’s time and effort to perform a task, without conveying control of a tangible asset, is not a lease. Mixed contracts that contain both service and lease elements have to be evaluated for an embedded lease component.

What’s Excluded

Several categories fall outside SFFAS 54 or get simplified treatment:

Software licenses, including subscriptions, site licenses, and cloud arrangements, are governed by SFFAS 10 (Accounting for Internal Use Software), not SFFAS 54.
Leases of biological assets such as timber, livestock, and crops are excluded and handled under separate frameworks.
Contracts that transfer ownership of the asset to the lessee by the end of the term, with no termination options, are accounted for as purchases by the lessee and financed sales by the lessor.³

Intragovernmental Leases

When one federal entity leases from another, the arrangement is intragovernmental and gets simplified accounting. The lessee does not record a right-to-use asset or a lease liability. The lessee expenses the payments; the lessor records receipts as income based on the payment provisions of the contract.³ Disclosure obligations still apply, but the balance-sheet mechanics do not. This category captures most General Services Administration occupancy agreements, where tenant agencies pay GSA for space in federally owned buildings.

Short-Term Leases

A short-term lease is a non-intragovernmental lease with a total lease term of 24 months or less.³ These can be expensed as paid without recording a lease asset or liability. Watch the term measurement, though: it includes the noncancelable period plus any extension options that are probable of being exercised. A one-year contract with a probable one-year renewal has a two-year term and just squeaks in. A likely second renewal pushes it past 24 months and knocks out the exception.

Embedded Leases and the SFFAS 62 Window

Contracts often bundle a service with dedicated use of equipment or space. A janitorial contract might include exclusive use of floor-cleaning equipment; a managed-services agreement might include dedicated servers in a contractor’s facility. Those arrangements can contain embedded lease components that would need to be pulled out and accounted for under SFFAS 54.

FASAB issued SFFAS 62 to provide temporary relief. A contract qualifies for the accommodation if it contains both lease and nonlease components and its primary purpose is attributable to the nonlease components (typically the service element), based on management’s professional judgment. Qualifying contracts can be treated in full as nonlease agreements, sidestepping the carve-out.⁴

The relief covers contracts existing as of October 1, 2023, and contracts entered into or modified on or before September 30, 2026. After that date, new or modified contracts have to be analyzed under the full SFFAS 54 framework. FASAB has issued a request for comment on a potential practical expedient for embedded leases beyond fiscal year 2026, with responses due by July 30, 2026.¹ Agencies leaning on the accommodation should be inventorying those contracts now.

SFFAS 62 also confirms that transition to SFFAS 54 is prospective. Agencies apply the standard to leases in effect as of the adoption date going forward, without restating prior-year statements.⁴

The Discount Rate Under SFFAS 61

The discount rate drives the size of the liability, and SFFAS 61 (issued in 2023) rewrote how agencies pick it. The hierarchy runs in two steps:

If the lease contract states the interest rate the lessor charges, use that rate.
If no rate is stated, use the interest rate on marketable Treasury securities with a maturity similar to the lease term as of the commencement date. Agencies may use a recent rate or a historical average and may round to the nearest maturity or interpolate between two maturities, so long as the methodology is applied consistently across periods.

For leases longer than the longest available Treasury maturity (currently 30 years), agencies use the 30-year rate rather than extrapolating.⁵ The Federal Reserve’s H.15 release publishes the daily Treasury constant maturity rates that agencies use as their reference.⁶

SFFAS 61 replaced earlier language pointing to an “incremental borrowing rate,” a concept that never fit federal agencies since they do not borrow the way private companies do.

When To Remeasure

Lease liabilities and assets are not fixed at inception. The lessee must remeasure the lease liability when certain changes occur and are expected to significantly affect the liability. Triggers include:

A change in the lease term, such as exercising or declining a renewal option.
A residual value guarantee becoming probable or no longer probable.
A purchase option becoming probable or no longer probable.
A change in estimated payment amounts already included in the liability.
A change in the lessor’s stated interest rate.
Resolution of a contingency that affects variable payments.

At remeasurement, the discount rate is refreshed to the marketable Treasury securities rate as of that date. Modifications, such as price changes, term extensions, or adding an underlying asset, are either treated as a separate lease or folded into the existing measurement depending on the nature of the change. An amendment that reduces the lessee’s right to use the asset is treated as a partial or full termination rather than a modification.³

The Lessor Side

Federal agencies acting as lessors mirror the lessee’s recognition. At commencement, the lessor records a lease receivable equal to the present value of expected payments and a corresponding amount of unearned revenue.² Unearned revenue also picks up any payments the tenant made at or before commencement that relate to future periods.

The lessor keeps the underlying asset on its books and depreciates it normally. As payments come in, the receivable is reduced, interest income is recognized, and the unearned revenue is drawn down as lease revenue over the life of the contract. The same discount rate hierarchy applies: stated rate first, marketable Treasury securities rate otherwise.⁵

Budget Scoring Is Not Financial Reporting

SFFAS 54 governs financial statements. It does not govern how leases score against budget authority. OMB Circular A-11, Appendix B, still does that, and it still classifies leases as either capital or operating for budgetary purposes even though that distinction no longer exists in financial reporting.

A capital lease requires budget authority equal to the net present value of all payments, scored upfront. An operating lease requires budget authority for first-year payments plus cancellation costs, or for total payments if the contract has no cancellation clause.⁷ Any proposed lease with total government payments exceeding $50 million must go to OMB for scoring review.

The practical implication is that accounting staff run two parallel analyses. A lease that looks like a financed purchase on the balance sheet may still score as an operating lease if it carries the right cancellation clause.

Disclosures

SFFAS 54 requires detailed note disclosures, and the requirements differ depending on whether the lease is intragovernmental.

For non-intragovernmental leases, lessees disclose a general description of their leasing arrangements (including the basis for any variable payments not included in the liability), the total lease assets and accumulated amortization presented separately from other property and equipment, a schedule of principal and interest payments for each of the next five fiscal years and in five-year increments thereafter, and the discount rate used.³ For intragovernmental leases, lessee disclosure is lighter: a general description of significant arrangements and annual lease expense broken out by major asset category.

Non-intragovernmental lessors disclose the carrying amount of leased assets by major class, total lease-related revenue for the reporting period, and revenue from variable payments. Intragovernmental lessors disclose a general description of significant leases and a schedule of future payments to be received, by year for the next five years and in five-year increments after that.³ Commitments for leases that have been signed but not yet commenced also require disclosure.

1
Federal Accounting Standards Advisory Board. Leases
2
U.S. Department of the Treasury. SFFAS 54 Lease Guidance – Right-to-Use Leases – Deemed Operating Leases with No Cancellation Clauses
3
Federal Accounting Standards Advisory Board. Statement of Federal Financial Accounting Standards 54 – Leases
4
Federal Accounting Standards Advisory Board. Statement of Federal Financial Accounting Standards 62 – Transitional Amendment to SFFAS 54
5
Federal Accounting Standards Advisory Board. Statement of Federal Financial Accounting Standards 61 – Omnibus Amendments 2023 Leases-Related Topics II
6
Federal Reserve. H.15 Selected Interest Rates
7
The White House. OMB Circular No. A-11 – Preparation, Submission, and Execution of the Budget