Sadly, SALY is suspended this year. ASC 842 is in effect, and auditing leases will never be the same. That is, until all clients adopt new accounting policies for all their leases. Who knows how long that will take?
Don’t panic
This guide explains the details of lease accounting as it applies to auditors.
The unfortunate truth is that many audit clients will need a lot of help becoming audit-ready. This presents you, the auditor, with an opportunity. Encouraging the decisions in this guide at adoption will help you:
About us: Netgain has already helped hundreds of companies transition with our flagship product, NetLease. Now, we’ve brought together our CPAs and former auditors to produce this guide. We offer a cloud-based solution built for auditors that simplifies the transition for clients and creates a consistent audit workflow: NetLease for Auditors.
The transition (Day One) accounting is crucial to the audit because the decisions made here will affect leases for their duration. Your clients will need to navigate a matrix of decisions to determine how to perform the initial accounting under the new standard.
In the following sections, we’ll explain the options clients have and how they will affect your audit.
Guide audit clients through the practical expedients available. These policy decisions will greatly influence the level of effort required to comply with the new standard:
Use of hindsight: If a client elects to use hindsight when determining lease classifications, they will be allowed to analyze the actual outcomes of lease terms and provisions and adjust comparative periods accordingly.
Not commonly used.
Package of practical expedients: A client electing this package of expedients will greatly reduce the level of audit procedures required around the implementation. Essentially, this package eliminates the need for clients to reassess any previously made accounting decisions around portions of their lease–accounting portfolio.
How a client performs lease accounting going forward impacts this audit and all audits for the rest of the leases’ duration. Clients will need help choosing Day Two methods.
The table below describes common areas of audit risk and how to address them with substantive procedures.
Not all contracts that meet the accounting definition of a lease are obvious. Sometimes, a contract may need to be recorded as a lease even if it is not labeled “lease.” A contract meets the definition of a lease if it “conveys the right to control the use of a specified asset.”
Acme Co. may have entered a contract with Standard Co. to host its data on a dedicated server. If embedded within the agreement is the right for Acme Co. to direct the use of that specific server, the agreement could meet the definition of a lease and need to be recorded as a lease.
Companies looking to be compliant with ASC 842 must review contracts and investigate whether those contracts contain embedded leases. These can be difficult to identify, so many companies have elected to engage consulting firms to assist in this process. For more information, read Don’t Be Surprised by Embedded Leases under ASC 842
Embedded leases can be tough to find. They can be a real lease in a stack of contracts, to coin a phrase. These are the best practices for finding them:
Here are some real-world examples of leases that fit the definition: conveys the right to control the use of a specified asset.
Thankfully, no. The right to use intangible assets is outside of the scope of ASC 842. For intangible assets, look to the ASC 350 for proper accounting standards.
Need to create a custom lease schedule for any special conditions of the lease
Excel version control does not provide full details
No central document repository
No control or automation around journal entries
No automation for reporting
No automation around modifications or early terminations
Lack of automation invites human error
NetLease for Auditors creates a stable workflow for any number of leases at a fixed cost. Simply enter the lease–contract details and get complete amortization schedules and journal entries based on ASC 842, IFRS 16 and GASB 87 guidelines.
standardizes audit cost by allowing unlimited users, clients and leases
by standardizing audit procedures with complete amortization schedules
by creating out-of-the-box reports for disclosures
for identifying client errors
It is worth your time to warn audit clients that the traditional Excel approach won’t work with the complex requirements of ASC 842. Any cost savings they achieve will be outweighed by the drawbacks. Convincing your clients to implement a software solution has downstream benefits for both your client and your audit staff.
For auditors:
For audit clients: