Internal Control Checklist for Leases

Audit, Accounting and Assurance Practice
Higher Education - ASC 842 Lease Accounting SolutionsHigher Education - ASC 842 Lease Accounting Solutions

The countdown begins now for a successful implementation of the new lease standard, Accounting Standards Codification (ASC) 842. The effect on each industry and entity will vary depending on the number and variety of lease types and extent of change from existing industry practices. All entities with leases will have to redraft accounting policies under the new principles and update internal controls. This is a critical step and should not be left for the last minute. Updates to internal controls will be more substantial than for other recently implemented accounting standards updates for several reasons:

  • ASC 842 is based on principles and removes the bright-line tests, which will require substantially more management judgment. In addition, it uses subjective terms, e.g., “insignificant,” “reasonably certain” and “substantially all.” Judgment may be required in the assessment of a lease’s term and in distinguishing between leases and services
  • New disclosure requirements are data intensive, e.g., weighted average calculations and variable payments
  • New ongoing remeasurement requirements, e.g., index or rate changes, modification to contract terms, and lessee’s assessment of options to extend, terminate or purchase underlying asset
  • Although not required, many companies may implement new lease software; these companies also will have to assess the related system and design risks

Below is a high-level list of types of internal controls that might need to be developed or updated to reflect ASC 842’s new requirements. This list is not intended to be comprehensive.

Internal Control Checklist Flow

TRANSITION-RELATED CONTROLS

  • Identification of all leases and lease obligations
  • Accuracy and completeness of the initial measurement of right-of-use assets and lease liabilities
  • Documenting and reviewing accounting conclusions and revised accounting

FINANCIAL REPORTING CONTROLS

  • Additions to financial reporting disclosure checklists related to ASC 842
  • Changes to inserts/footnote disclosures for ASC 842 compliance
  • Recalculation/review of data-intensive elements, including weighted average calculations and variable lease payments

ACTIVITY-RELATED CONTROLS

  • Identification of embedded leases
  • Classification of operating versus financing leases
  • Timely identification of lease modifications
  • Review/approval of new leases and changes to leases
  • Calculation/recording of leasehold assets and liabilities

IT GENERAL CONTROLS

  • Completeness and accuracy of source data and system interfaces
  • Review/approval through workflow management of changes to lease information
  • Segregation of duties
  • Change management, logical access and operations controls over the new leasing system
  • Implementation of audit trail

Conclusion

The adoption of ASC 842 may be complex and likely will require significant hours to implement correctly. If you would like assistance complying with the lease standard, contact your trusted BKD advisor. BKD has prepared a library of BKD Thoughtware® on lease implementation issues. Visit our website to learn more.

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