Ready, set, go for adoption
Like it or not, the time is now upon us. With the ASC 842 transition date for even private companies now in the rearview mirror, virtually all audit clients must now comply with the new standard. This new method of recording leases can be quite complex and difficult, as evidenced by the Financial Accounting Standards Board (FASB) pushing adoption deadlines back for private companies after recognizing the headache that public companies experienced with their 2019 adoption deadline.
During my time spent as an auditor and consultant, I watched capable accountants struggle to correctly record all kinds of transactions. You would expect straight line depreciation for a fixed asset or accruing payroll expenses to be easy enough, but I was always amazed by the creative ways accounting teams improperly booked these simple entries. Given the tricky nature of these lease PV calculations, required disclosures, practical expedients, interest rate inputs, (and the list goes on and on), ASC 842 is undoubtedly going to top my list of wild ways I’ve seen companies attempt accounting.
Probable problems
While this new standard is likely uncharted waters for clients, challenges may be similar for auditors if clients are ill-prepared to live in this new lease accounting world. ASC 842 will be a higher risk area for audits this year, requiring greater sample sizes and increased scrutiny. This could turn a routine, simple audit into something far more time-consuming and margin deteriorating. Client lease contracts could be convoluted, documentation might be hard to track down, rent terms may have changed due to no longer needing office space, or clients may not have even attempted to make proper disclosures relating to their leases. (Again, the list goes on and on with the potential issues in auditing ASC 842).
Plan, prepare, execute
Over-preparation is nearly impossible when dealing with these upcoming audits. Here are some recommendations you could pass on to your clients to make this process a little less painful:
- Hire a consulting pro with lease experience. This is likely not the most affordable option, but some individuals or firms out there really know what they are doing.
- Elicit input from stakeholders. Making them aware of the situation will help them understand the complexity and they may even surprise you with the ideas they share.
- Explore purchasing a lease accounting software tool. It’s 2022! If cars can drive themselves these days, it’s no surprise that options exist for helping automate this accounting process and limit human error. In fact, we have created a powerful lease auditing tool for this exact purpose.
- Understand the implications of balance sheet recognition. These new items on the balance sheet could affect important debt-to-income or other key ratios that might have a serious impact on your clients’ businesses. Let them know that this is something to get on their radar ASAP.
Bottom line
Clients AND auditors need to act now. Begin discussions now about how you are going to handle the daunting task of auditing ASC 842 leases. The more prepared you and your clients are for this undertaking, the smoother your audits will go and the happier you and your clients will be!
