implementing sffas 54: leases

Implementing SFFAS 54: Leases ASMC PDI 2021

Christopher Stewart, partner, Deloitte & Touche LLPChris Christian, Highly Qualified Expert, Department of Navy

June 4, 2021

Copyright © 2021 Deloitte Development LLC. All rights reserved. 2

Agenda

Getting to know the new lease standards

Implementation considerations

Lessons learned from public company implementations


Getting to know the new lease standards


The new lease accounting model will result in most leases being recorded on the balance sheet for lessees and lessors - a new requirement

Changes go beyond accounting policy, affecting systems, processes, controls, audit readiness, leasing, or procurement strategies and operations of many parts of the government

SFFAS 54 was released by the Federal Accounting Standards Advisory Board (FASAB) and is applicable to all federal agencies

Getting to know SFFAS 54 the “new lease standard”

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Effective date and adoption methodology

SFFAS 54, Leases

Applicable to • Federal agencies

Effective date per guidance

• Reporting periods beginning after September 30, 2022

Early adoption • Not permitted

Adoption methodology

• Prospective

• No prior period adjustment

Effective date based on year-end

Year-end SFFAS 54 Effective Date• September 30 October 1, 2023


Get to know the new lease standards—specific changes to lease identification

• Increased emphasis on applicability of lease accounting to contracts conveying the right to control the use of PP&E (underlying asset)

• Requirement to bifurcate lease vs. non-lease elements residing in a single “service contract”

• “Operating Lease” and “Capital Lease” concepts eliminated, and single accounting model introduced for Leases1 (subject to certain exceptions)

• New SFFAS model completely disconnected from OMB No. A-11

Single LeaseActg. Model

• Intragovernmental and short-term leases (i.e., probable lease term of 24 months or less) to be accounted for similar to current “operating leases”

Practical Expedients

• Scope exclusions for immaterial leases and contracts that transfer ownership (reported as a financed purchase/sale)

Scope Exclusions

Practical considerations

• Identify “embedded leases” residing in service contracts (e.g., data management contract with elements of physical data servers/centers)

• Determine practical valuation methodology to separate lease vs. non-lease components (e.g., common area maintenance fee vs. rent)

• Consider non-cash transactions (free access to assets/space in return for other services)

• Complex calculations required for lessees to record− Right-to-use Asset (ROU) and Lease Liability− Modification and reassessment adjustments

• Complete disconnect from OMB’s Budgetary lease scoring criteria (two sets of classification calcs)

• Need to accurately compartmentalize contracts • In-depth assessment required to support “probable

lease term” used for short-term classification• Increased disclosure requirements

• Build support for “probable” ownership transfers• Perform analysis to support immaterial lease

classification at consolidated level (do not default to PPE capitalization threshold)

• Annual reassessment required on both categories

Technical requirements

Embedded Leases

1. “Leases” is used in reference to: Leases Other than Short-Term Leases, Contracts or Agreements that Transfer Ownership, and Intra-governmental Leases.


Implementationconsiderations


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Implementing the new lease accounting standards—why now?

• The new lease accounting standard represents the most pervasive change introduced by the FASAB in many years

• Implementation efforts will likely take well over a year for reporting entities with a significant volume of leases

• Effective and timely implementation is recommended for:Ø Obtaining an audit opinion free of material weaknesses or significant

deficiencies; Ø Enhancing ability to make key operational decisions (e.g., lease vs buy,

property management/maintenance) and managing real estate footprint;Ø Minimizing manual labor required to maintain compliance and establishing a

sustainable process that frees up valuable resources for meaningful tasks


Preparation is a necessity when considering the areas of impact.

Critical steps in your path toward achieving compliance

Develop a plan with milestones

Foster organizational collaboration

Read and get to know the new lease

standards


Leverage technology as part of the implementation strategy

Lease accounting solutions

Point solutions

Enterprise solutions

Spreadsheet/custom solutions

Integrated lease management

Lease accounting solution options


Leverage technology as part of the implementation strategy

Considerations for selecting a solution

Cloud vs on-premises

Security controls

Accessibility

SOC reports

Auditability considerations

Level of vendor presence in public accounting

Storage requirements

Comprehensiveness of solution

Range of functionality

History of solution


Fostering organizational collaboration

• Implementation of the new lease standards may significantly impact many departments and stakeholders from various levels of the organization outside of the CFO/Comptroller Office.

• Misalignment between stakeholders and/or lack of ongoing communication is a common reason for extended project timelines and deficient implementation.

• Changes in processes, internal controls, and IT systems are likely necessary to help ensure all leases are captured and the lease data necessary to apply the new lease standard (including disclosures) is compiled efficiently.

• Likely requires a significant level of collaboration across the organization, including but not limited to the office of the CFO/Comptroller.


Lessons learned from public company lease implementation


Lessons learned from public company lease implementations

Finding leases may not be straightforward

Required lease data can be a challenge to abstract, migrate, and maintain

Spread the word early about implementation

Systems and processes may require more attention than expected and desired

Accounting judgments and estimates can be complex and involve many stakeholders

Think of internal controls throughout the journey

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Lesson 1—Accounting judgments and estimates can be complex and call for alignment between various stakeholders


• Determination of the key accounting estimates will likely involve multiple inputs and judgments, (e.g., determination of the lease term or discount rate).

• Accounting estimates and judgments necessary may be different for each type of contract and require accounting to become familiar with certain operations aspects.

Implementation considerations:• Review sample contracts early for all identified

portfolios in order to identify points that may require extensive accounting evaluation.

• External and internal auditors should be on the implementation journey, starting from the beginning.


Lesson 2—Finding leases may not be straightforward


• Not every lease is labeled a “lease agreement” and identifying embedded leases can involve considerable time and judgment as many of these contracts may not have been identified as leases in the past.

• Leases may be tracked and maintained in disparate systems, databases, and systems and by different groups of individuals.

• Stakeholders within functions outside of real estate/facilities will likely need to be trained on “what is a lease” to support in identifying contracts with embedded leases.

• Locating and compiling the entire population of leases may take several months complete.

Implementation considerations:• Start with identifying the individuals who have the best knowledge of

contracts signed.• Obtain leadership endorsement for the project.• Undertake careful planning upfront to identify a complete population of leases

and to establish appropriate procedures as new and modified leases are executed.• Take a close look at all operations, identifying areas where embedded leases are

more likely to exist.


Lesson 3—Required lease data can be a challenge to abstract, migrate, and maintain


• Many lease agreements contain complex terms and conditions that could impact accounting conclusions.

• Some lease agreements have numerous amendments, making identification of the appropriate source document for relevant data fields a further source of complexity.

• Lease agreements may not be stored in repositories that are consolidated and consistently structured.

• Lease agreements do not contain all of the necessary data necessary to comply with the new lease standards (e.g., discount rate and fair market values).

• Abstraction of lease and lease data could take an average of 4-12 months to complete

Implementation considerations:• Don’t underestimate what it takes to collect, organize, and maintain lease

data• Seek to achieve efficiencies by:

− developing robust plans− implementing data quality checks and controls− leveraging technology in combination with suitably trained and skilled data

specialists


Lesson 4–Systems and processes may require more attention than expected and desired


• The new lease standard requires significantly more data and calculations to produce accounting journal entries and disclosures.

• Most companies acquired new lease technology solutions or modified existing systems for lease accounting. Many have discovered that it often takes longer than expected for a new tool to be fully operational.

• System and process challenges could delay the overall implementation.• Internal processes and requirements for systems that need to be approved for

use can significantly impact the implementation timeline.Implementation considerations:• Begin the system implementation process including understanding your

business requirements, vendor demos, and selection process.• Consider effective project management practices to efficiently use project

resources and to manage timeline risk, particularly in areas such as:− business requirements development− application integration− system testing− user training


Lesson 5—Think of internal controls throughout the journey


• Auditors will expect controls to have been implemented throughout the project, starting with the completeness assessment for both the population of leases identified and each individual portfolio.

• Transfer of data between systems may result in the need for additional controls to be implemented.

Implementation considerations:• Make internal controls an integral part of

your project plan from day 1.• Consider how each initiative may be looked at

from a control perspective, what internal controls may be built around them.

• External and internal auditors should be on the implementation journey, starting from the beginning.


Lesson 6—Spread the word early about implementation


• Implementation is not an accounting-only endeavor. Other departments will likely be impacted.

• Companies learned that involving other departments upfront is critical, not only for efficient planning and implementation, but also to identify opportunities for ancillary benefits.

Implementation considerations:• Consider building a detailed implementation

roadmap and project plan showing adoption-related tasks across all affected functions.

• Consider a cross-functional training around the new lease standard and potential impacts; get your stakeholders involved early.

• Involve leadership in communications so as to continue demonstrating its endorsement.


Question and answer


Contact information

Chris Stewart

PartnerDeloitte & Touche [email protected]

Connect on LinkedIn

Veronica Smith-Christian

Highly Qualified Expert Department of [email protected]

mailto:[email protected]

https://www.linkedin.com/in/chris-stewart-05071186/

mailto:[email protected]

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2021 Deloitte Development LLC. All rights reserved.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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