New Lease Accounting Standards for Auditors
Out with the old and in with the new.
Recently, Financial Accounting Standards Board ASC Topic 842, Leases or ASU 2016-02 replaced the older guidance of Generally Accepted Accounting Principles ASC 840, Leases to increase transparency and comparability for auditors.
This new standard has changed the treatment for leases with its sole purpose now requiring organizations, who enter into a lease, to disclose the assets and liabilities of their leases on the balance sheet.
It will also allow operating leases and finance leases to be capitalized on the balance statement as a single-line item, but its treatment will differ on the income statement.
While the new standard requires auditors to make sophisticated judgments when preparing financial statements, the only leases that are exempt are short-term leases of 12 months or less.
For a contract to qualify as or contains a lease, auditors must perform a “completeness test” to accurately record or updated lease arrangements throughout the year.
- There must be an identified asset where the lessee must receive substantially all of the asset’s capacity.
- The lessee has the right to receive substantially all of the economic benefits.
- The lessee has the right to direct the use of the asset.
Auditors will need to calculate the right-of-use asset and lease liability amount and assess the reasonableness of the businesses “completeness” once more.
- Identify persons or roles with authority to execute contracts containing a lease,
- Identify vendors with a higher risk,
- Review internal processes for authorizing recurring monthly payments
- Analyze entries to rent expense
- Ensure adequate training and involvement of stakeholders
- Review prior footnote disclose support schedules for completeness and accuracy.