Auditing ASC 842 Lease Accounting: An Auditors Guide to Evaluate ASC 842 Lease Accounting Compliance

iLeasePro ASC 842 Lease Accounting

When an auditor evaluates a company’s implementation of ASC 842 lease accounting, they generally follow a series of steps to ensure compliance. These steps may vary slightly depending on the specific circumstances of the company and the auditor’s approach. However, a general process is as follows:

  1. Understand the entity’s leasing arrangements: The auditor should review the company’s leasing contracts and gain a deep understanding of the nature of the arrangements, as well as any related policies and procedures.
  2. Evaluate the lease identification process: The auditor should assess the company’s process for identifying leases and ensuring that all lease contracts are properly accounted for under ASC 842.
  3. Review lease classification: The auditor should review the company’s methodology for classifying leases as either operating or finance leases. This involves evaluating whether the lease meets any of the following criteria:
    • The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
    • The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
    • The lease term is for the major part of the remaining economic life of the underlying asset.
    • The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
    • The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
  4. Assess lease recognition and measurement: The auditor should verify the accuracy and completeness of the company’s calculations of lease liabilities and right-of-use (ROU) assets. This includes reviewing the company’s assumptions, such as the discount rate, lease term, and any variable lease payments.
  5. Test lease-related balances and disclosures: The auditor should perform substantive testing of lease-related balances, such as ROU assets, lease liabilities, and lease expenses. Additionally, the auditor should assess the completeness and accuracy of the company’s lease-related disclosures, as required by ASC 842.
  6. Evaluate internal controls: The auditor should assess the effectiveness of the company’s internal controls surrounding the lease accounting process, including the identification, classification, recognition, measurement, and disclosure of leases.
  7. Assess the impact of any lease modifications or reassessments: The auditor should review any lease modifications or reassessments that occurred during the audit period to ensure they have been accounted for correctly under ASC 842.
  8. Obtain management representations: The auditor should obtain written representations from management confirming the completeness and accuracy of the company’s lease accounting and disclosure under ASC 842.
  9. Conclude on the audit: Based on the audit procedures performed and the evidence obtained, the auditor should determine whether the company’s lease accounting and disclosures are in compliance with ASC 842 and whether any adjustments or modifications are necessary.

Increase Your Ability to Comply to the ASC 842 Lease Accounting Standard. Try iLeasePro for free right now;

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

Implementing Top 10 Lease Accounting Internal Controls to Ensure Success

iLeasePro Internal Controls for Lease AccountingImplementing new processes and internal controls is crucial for ensuring accurate and timely lease accounting under the new standards. Here are some key processes and controls to consider:

  1. Lease identification and inventory: Establish a process to identify and track all lease agreements, including embedded leases within service contracts or other arrangements. Maintain a comprehensive lease inventory with relevant information such as lease terms, payment schedules, and classification.
  2. Lease classification: Develop a consistent methodology for classifying leases as operating or finance leases based on the new accounting standards. Implement a review process to ensure lease classification is accurate and consistently applied.
  3. Lease measurement and calculations: Create a standardized process for calculating lease liabilities and right-of-use (ROU) assets, including determining appropriate discount rates and lease terms. Implement controls to ensure accurate and timely calculations.
  4. Journal entries and account reconciliations: Develop a process for recording lease-related journal entries and reconciling lease accounts in the general ledger. Implement periodic account reconciliations to verify the accuracy of lease balances and transactions.
  5. Lease modifications and reassessments: Establish a process for identifying and accounting for lease modifications, such as changes in lease terms or payment amounts. Regularly reassess lease agreements for any changes that may require adjustments to lease accounting.
  6. Disclosure and reporting: Implement a process for preparing lease-related disclosures and reporting required under the new accounting standards. Ensure that the financial statements accurately reflect lease transactions and balances.
  7. Staff training and communication: Provide training and resources to accounting staff to ensure they understand the new lease accounting standards and can apply them accurately. Establish clear lines of communication to address questions and concerns related to lease accounting.
  8. Segregation of duties: Implement segregation of duties to minimize the risk of errors or fraud in lease accounting. For example, separate responsibilities for lease identification, measurement, and journal entry recording among different individuals.
  9. Periodic review and audit: Perform regular internal reviews or audits of lease accounting to ensure compliance with the new standards and identify areas for improvement. Address any identified issues or discrepancies promptly.
  10. Continuous improvement: Monitor changes in lease accounting standards, guidance, and best practices to ensure your company’s processes and controls remain current and effective. Continuously refine and improve lease accounting processes and controls based on feedback, experience, and industry developments.

Try iLeasePro for free right now;

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

Maximizing Property Management Efficiency: The Importance of a Centralized Lease Data Repository

iLeasePro Central Repository Document Management

A centralized lease data repository is critical for a property manager for several reasons:

  1. Efficiency: A centralized system consolidates all lease information in one location, making it easier for property managers to access and manage data. This saves time and effort, as they no longer need to search through multiple sources or physical files.
  2. Accuracy: Centralizing lease data helps maintain accuracy and consistency by ensuring all information is up-to-date and free of discrepancies. It reduces the risk of errors, miscommunications, or outdated information, which can lead to legal or financial issues.
  3. Analysis and reporting: A centralized repository allows property managers to quickly and easily generate reports, analyze trends, and track key performance indicators. This can help them make informed decisions, identify areas for improvement, and optimize property performance.
  4. Collaboration: A centralized system enables better collaboration among property management teams, as well as with external stakeholders like property owners, tenants, and service providers. It allows for real-time sharing of information and streamlined communication, promoting a more cohesive work environment.
  5. Compliance and risk management: A centralized lease data repository makes it easier to track compliance with local, state, and federal regulations. It also helps property managers identify and address potential risks, ensuring they meet their legal and contractual obligations.
  6. Document management and storage: Centralizing lease data helps property managers manage and store lease documents, such as contracts, amendments, and addendums, more effectively. This can reduce the risk of losing or misplacing critical documents and ensure they are securely stored and backed up.
  7. Scalability: As a property management company grows and acquires more properties, a centralized lease data repository can easily accommodate this growth, providing a scalable solution that remains efficient and effective.
  8. Cost savings: Implementing a centralized lease data repository can lead to cost savings by reducing the need for manual data entry, duplication of efforts, and the use of multiple software systems. It can also reduce the risk of costly errors and legal disputes.

In summary, a centralized lease data repository is critical for a property manager as it promotes efficiency, accuracy, collaboration, and scalability while helping manage compliance, risk, and cost.

Try iLeasePro for free right now;

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

8 Key Risks of Relying on Spreadsheets for ASC 842 Lease Accounting Compliance

While spreadsheets are widely used for various tasks in accounting, they may not be the ideal tool for complying with the ASC 842 lease accounting standard. The ASC 842 standard, which was introduced by the Financial Accounting Standards Board (FASB), aims to increase transparency and comparability of financial statements by requiring lessees to recognize assets and liabilities for leases with terms greater than 12 months. Using spreadsheets for compliance with ASC 842 comes with a number of risks and limitations, including:

  1. Human error: Spreadsheets are prone to human errors, such as incorrect data entry, formulas, or assumptions. These mistakes can lead to inaccurate financial reporting, which may have severe consequences for businesses and their stakeholders.

  2. Limited scalability: Spreadsheets may work for small organizations with a few leases, but they can become unwieldy and inefficient as the number of leases increases. Complex calculations and multiple data sources can lead to slow processing times and poor performance.

  3. Lack of automation: Spreadsheets do not provide automation features, such as automatic updates to lease calculations or generating journal entries. This increases the time and effort required to maintain lease schedules and ensure compliance.

  4. Difficulty in handling lease modifications: ASC 842 requires organizations to account for lease modifications, such as changes in lease terms or payment amounts. Spreadsheets can be cumbersome and time-consuming when it comes to handling these modifications, increasing the risk of errors.

  5. Inadequate audit trails: Spreadsheets lack robust audit trails, making it difficult to track changes and identify potential errors. This can lead to a lack of transparency and increased risk during audits.

  6. Limited collaboration and version control: Spreadsheets can be challenging to manage when multiple team members need to access and update them. This can result in version control issues and difficulty in maintaining a single source of truth for lease data.

  7. No built-in compliance checks: Spreadsheets do not have built-in compliance checks for ASC 842 requirements, leaving it up to users to manually ensure compliance. This increases the risk of non-compliance and related penalties.

  8. Inability to integrate with other systems: Spreadsheets typically don’t integrate seamlessly with other financial and accounting systems, making it difficult to consolidate data and generate accurate financial statements.

To mitigate these risks, organizations should consider implementing a dedicated lease accounting software, like iLeasePro, that is specifically designed to comply with ASC 842 requirements. These solutions offer features such as automation, scalability, audit trails, and integration capabilities, which can help organizations reduce the risk of errors and ensure compliance with the standard.

Try iLeasePro for free right now;

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

iLeasePro is making it easier for CPA, Advisory, Consulting Firms and VARs to support their clients’ ASC 842 compliance needs

iLeasePro, the cost-effective cloud lease accounting solution, recently released a new feature specifically for CPA, Advisory, and Consulting firms that need to manage and support multiple clients transition and adoption to the ASC 842 Lease Accounting Standard. This enhancement offers the ability to link across multiple accounts within iLeasePro at the click of a button.

iLeasePro is an intuitive, cost-effective and accurate cloud lease accounting and lease management solution that simplifies the transition to and adoption of the ASC 842 Lease Accounting standard changes.  

Key Lease Accounting Features included in iLeasePro;

  • Day 1 Automatically build ASC 840 Adjustment Journal Entries
  • Setup Individual Leases According to the ASC 842 standard requirements
  • Generate Amortization Schedule for a lease or the entire portfolio of leases
  • Generate ASC 842 Compliant Journal Entries for a lease or the entire portfolio of leas
  • Journal Entries and Amortization Schedules can be exported or uploaded to your accounting system
  • ASC 842 Financial Reporting Disclosure reports
  • Automated Journal Entries for Variable Payments and Operating Sublease

In addition to its intuitive use, cost-effective pricing and accurate lease accounting calculations, iLeasePro offers lease management features like document management, critical date notification and portfolio management for your client lease portfolios.

Try iLeasePro for free right now;

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

How Will the FASB ASC 842 Standard Improve Lease Accounting?

Account, Accounting, Audit, Budget, Business

The FASB Accounting Standards (ASU) for topic ASC 842, Lease Accounting, became effective at the end of 2021 for all reporting periods after December 15th 2021. This standard brings about significant changes across many different industries. With the new standard in effect, public and private companies must ensure they are following the new accounting guidelines.  

Apart from being compliant, companies can reap several benefits from implementing the new principles. In this article, we will take a closer look at how ASU (ASC 842) will help companies improve their accounting infrastructure.  

How Will The New ASC 842 Improve Accounting? 

More Accuracy 

The first benefit companies get to enjoy is that by recording the leased assets as inscribed in the new standard, the end-representations are much more faithful in showing what the lessee and lessor’s rights are.  

Decreased Chances of Fraud 

Because of how thorough the new accounting principles are, the recorded transactions don’t present as many opportunities anymore for fraud or misrepresentation of facts geared towards a specific gain in the balance sheet. If there are any, auditors will be able to identify the same easily.  

Improved Understanding of Statements  

The increased thoroughness also means an improved understanding of the statements by external auditors and investors alike. The disclosure notes further help elaborate on what the statements present, which, in turn, means more trust from investors, partnering companies, and governments.  

Better Transaction Alignment  

By recording transactions as suggested by the new guidelines, lessors can keep a better record of their lease accounting, particularly the sale and leaseback transactions. Revenue recognition also improves, which further strengthens the company’s bottom line.   

Ability to Make Informed Decisions 

This is something that investors and the company itself get to benefit from greatly. The thorough nature of lease accounting means a better understanding of all lessor’s activities in regards to the leased asset. Companies can use this information to make better decisions about the lessors and increase the chances of risk recognition and mitigation. 

Clarification of Lease Practices 

One of the most prevalent benefits of this lease accounting type is that lessors and lessees can analyze each other’s lease accounting and treatment practices and address issues present in the current GAAP. Hence, it gives them ample opportunity to align interests, control, and other aspects of the lease.  

This also allows companies to micromanage the lease if they wish to do so or let it play its course out, thus giving both parties more versatility.  

This is just a sneak peek into the myriad of benefits that companies can enjoy by implementing the new ASU and its guidance.

However, changes can be implemented properly. If you would like to ensure all changes are implemented the right way without having to spend more on training or hiring experts, you can simply use iLeasePro.

There are a several lease accounting software companies out there that you should evaluate, but please include iLeasePro because we will provide the features you need at a price that makes sense.

Impairment of Leased Assets and the Right-of-Use Asset

The recent changes in ASC 842 along with the Coronavirus pandemic have come together to unleash a plethora of chances in how leased assets are treated – not just for the lessee but for the lessor as well. One significant impact of the two happenings is that leases need to be recorded as a liability and a corresponding asset, and that companies hit hardest by the pandemic are starting to lease out their assets (respectively). 

ASC 842’s changes about recording leases as an asset and a liability are also applicable on right-of-use assets (ROU assets), and will therefore be subject to the same impairment standards as set for other assets under ASC 360 (Property, Plant, and Equipment). 

On top of that, once an organization starts adopting the new ASC 842 changes, they will have to cease the application of ASC 420 (Exit and Disposal Costs) to all their lease arrangements. Since losses can be recorded long before they actually occur, if an organization has put any liabilities in their books that reflect the standard, i.e., were recognized as exit/disposal costs with respect to a leased asset, it will have to be eliminated. 

The preexisting liability will need to be adjusted with respect to the newly recognized right-of-use asset. Because of this, there is a major transition consideration to keep in mind with regards to impairment of leased assets and ROU assets.  

Leased Asset Impairments That Were Previously Unrecorded May Need tBRecognized 

Assets are only recognized when listed on the balance sheet. Leased assets will have to adopt the same principle. A liability will have to be created with respect to the lease, while a corresponding leased asset will have to be recognized under ASC 360.  

If an organization has any leased assets that weren’t previously recorded in this manner, it will have to be done upon adoption. In some cases, the organization will also have to recognize an impairment of asset that may have occurred before recognition.  

If the carrying value of a long-lived leased asset is less than the impairment calculated, it would mean that the organization has not recognized the entire impairment value. When the transfer is made, the unrecognized portion of impairment should be recorded in such a manner that the ROU asset value exceeds its fair value.  

If there is an offset, it can be recorded as a loss or as equity. In any case, the lease would still be recognized as an operating lease.  

Furthermore, if there are any exit costs associated with the lease, it will be recorded as a lease expense – even if the organization decides to stop using a leased asset (unlike in the old ASC 842 provisions where the remaining fair value would be recorded as a liability under ASC 420). This is because variable payments won’t be considered when measuring the value of an ROU asset.  

Instead of recording it as a negative lease asset, an organization should reduce the carrying about of this asset to zero and either derecognize it or carry the remaining balance forward. 

Remembering all these provisions can prove to be difficult – not to mention the immense recalculation costs involved. If you’d like an easy way to handle your lease accounting needs, we recommend you give iLeasePro a go. Call us today to schedule a free demo! 

ASC 842 Changes: Would a Specific Incremental Borrowing Rate Be Better?

image_pen The problem of determining the rate implicit in a lease also presented a concern that most preparers used the incremental borrowing rate (IBR) as the discount rate. However, that wasn’t the only concern that came to light during FASB’s roundtable in September 2020.   Apart from the rate implicit, members also discussed the IBR; i.e., how those that have adopted ASC 842 determine the IBR. It was recognized that a lot of time and effort goes into estimating the borrowing rate.  The Problem  For Non-Public Business Entity (Non-PBE) lessees, a risk-free rate is determined which uses a period set in the lease terms (paragraph 842-20-30-3). This risk-free rate was another cause for concern at the roundtable. The use of this risk-free rate under the current economic climate meant low rates and therefore high artificial lease liabilities, thus being potentially misleading for users.   When the costs incurred to determine the IBR, and the prospect of using a risk-free rate were combined, a question arose whether non-public business entities as well as public should be allowed to use some other rate or not.  Alternatives Proposed  Based on the argument, FASB proposed two alternatives to the members, preparers, and users in the roundtable handout. 
  1. No change. The rate and method used right now to determine and use IBR for PBE and non-PBEs should remain the same.  
  1. Both PBE and non-PBE lessees must use a market-specific rate instead of IBR.  
When the two alternatives were discussed, following were the respective arguments for and against the prospects.  
  1. Non-PBE would encounter issues when trying to determine IBR that falls on the definition presented in ASC 842 for IBR. The problem they would face would primarily be that they don’t have enough resources or departments that can determine a lease credit risk. However, if nothing is done, it is important to remember that the cost of determining IBR will only go down on a go-forward basis.  
  1. The second alternative suggested that a rate be recommended like in ASC 944 (Insurance) and ASC 715 (Compensation). The use of this rate would significantly simplify the whole process, not to mention result in more uniform and comparable books. The problem here is that the rate may be very different from risk-free rates that non-PBEs use. 
The Decision  Most participants agreed that the first alternative is much better, i.e., current requirements for IBR should remain the same for public companies. Preparers agreed that creating a new process for IBR would cost even more, though they agreed that postimplementation costs would be lesser.   Since users mostly use Disclosureto compare and evaluate companies, IBR didn’t really make much of a difference there.  However, this was all limited to PBEs. When it came to non-PBEs, most members were in favor of making adjustments to the standard. The change in ASC 842, if any, would be targeted toward allowing non-PBEs to choose whether they use the risk-free rate on: 
  • An asset-class basis  
  • Or for the whole entity. 
It was acknowledged there was a certain arbitration involved by allowing non-PBEs to use risk-free rates. To that end, members mostly were in favor of letting the FASB determine a specific rate for non-PBEs and implementing it via ASC 842.   Try iLeasePro for free right now; You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm comply to the ASC 842 Standard.

Implementing the New Lease Accounting Standard

Leases (Topic 842) was issued by the Financial Accounting Standards Board (“FASB”) in February 2016 and represented a rather substantial change in how leases are to be accounted for, especially for lessees. More than 30 months have gone by and the effective date to implement the new standard is fast approaching. The effective date for public business entities is for annual periods beginning after December 31, 2018 and for other entities (private companies) for annual periods beginning after December 15, 2019. Since the new revenue recognition standard was issued at about the same time as Topic 842, many companies focused almost all of their attention on revenue recognition and delayed focusing on lease accounting. However, time is running out and there are a number of issues that must be addressed quickly as part of the Topic 842 implementation.

In this article, we will discuss some of the key decisions and more difficult assessments that have to be made by lessees as part of implementing the new standard.

Transition Method

When the FASB originally issued the standard, it set the transition date requirements as the later of: (1) the beginning of the earliest period presented in the financial statements or (2) the commencement date of the lease. In a recently adopted update to the standard, the FASB provided a significant time saving transition option which would allow the transition date to be the date of initial application. As a practical matter, this allows public companies to apply the standard on January 1, 2019 (private companies on January 1,2020) and not have to restate the prior periods presented in the financial statements. Companies that choose this transition option would be required to provide Topic 840 comparative period disclosures.

In a recent survey by KPMG LLP, almost 75% of companies surveyed intend to avail themselves of this alternate transition approach.

Package of Practical Expedients

There is a package of practical expedients provided in Topic 842 as a means of lessening the burden of transition. An entity may elect not to reassess:

  • Whether expired or existing contracts contain leases under the new definition of a lease;
  • Lease classification for expired or existing leases; and
  • Whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.

Note that Topic 842 has curtailed what may be considered an initial direct cost when compared with Topic 840.

This list of practical expedients would have to be adopted on an all or nothing basis for the entire portfolio of leases. And note that errors in the application of Topic 840 are not grandfathered as part of this provision. The overall effect of this transition option will be that existing leases will continue to be recognized in accordance with current US GAAP except that entities will have to (1) recognize a lease liability and right of use asset for operating leases and (2) if the lease is modified, account for the lease under Topic 842 at the date of modification.

In the survey noted above, a vast majority of public companies plan to elect the package of practical expedients, with many private companies still undecided. Almost all private companies are ultimately expected to adopt this option.

Use of Hindsight

Hindsight is allowed when considering the likelihood that an option to extend or terminate the lease will be exercised or a purchase option will be exercised and assessing the impairment of a right of use asset. This transition option can be elected on its own or in combination with the package of practical expedients noted above.

In the KMPG survey, most of the respondents indicated that they were undecided as to whether to elect this option. The main drawback to hindsight is that necessary transition adjustments cannot be finalized prior to the effective date and entities have to evaluate all relevant factors impacting hindsight at the effective date.

Embedded Leases

Embedded leases are a somewhat new concern coming out of adoption of the new standard. Embedded leases are components within contracts that entail the use of a particular asset, where the user has control over that asset. Therefore, they meet the definition of a lease. The language in the contract may not contain the word “lease”. These lease arrangements may not have been previously identified and the portion of the contract that meets the definition of a lease may be a relatively small component of the contract. These types of arrangements may be found in IT services contracts and supply contracts to name a few.

Under Topic 840, these lease arrangements may have been accounted for substantially the same as an operating lease with no material financial statement impact. Topic 842 requires operating leases to be recognized on the balance and thus the importance of identifying these embedded lease arrangements. Consequently, certain contracts may require a fresh look with an evaluation of whether they contain a right to use an identified asset.


If your lease portfolio is relatively small and your lease terms are relatively straight forward, it may not be difficult to conclude upon the aforementioned issues. But for many, transition matters will have to be closely evaluated and matters such as embedded leases will require a fresh evaluation and establishment of processes and procedures going forward. If you have not thought about these matters yet, now is the time to start.

Please contact iLease Management if you are seeking any help complying with this FASB compliance. Please visit:

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