Identify Unrecorded Leases with AP Data

The Critical Role of AP Data in Uncovering Unrecorded Leases

For controllers, accounting managers, and auditors, finding every lease obligation is where ASC 842 audit readiness starts. We've seen firsthand how entities missed lease components tucked away in service agreements. Others simply failed to capture every contract that truly met the definition of a lease.

Using AP data to identify unrecorded leases means finding, assessing, and recognizing on the books every contract that meets ASC 842's definition of a lease. Lease completeness for ASC 842 compliance remains a hard problem, because so many contracts aren't labeled as leases. This article shows how Accounts Payable (AP) data offers a reliable, and frankly, often underused, way to find missing leases early and reduce the risks they carry.

Q: What is an unrecorded lease? An unrecorded lease is any contract, or part of a contract, that meets the definition of a lease under ASC 842 but has not been recognized on the lessee's balance sheet: no Right-of-Use (ROU) asset and no matching lease liability (ASC 842-20-25-1). A lease the company has properly kept off the balance sheet under the short-term lease policy election is not unrecorded (ASC 842-20-25-2). We often find these hiding in service agreements, purchase orders, or master service agreements.

How Auditors Test Lease Population Completeness

Auditors approach lease accounting with a healthy skepticism. They focus hard on the completeness and existence assertions. The completeness assertion is the auditor's objective to verify that all transactions and accounts that should be recorded are in the financial statements.

When performing lease audit procedures, we want to be sure the whole population of contracts containing a lease has been found. This area matters because an incomplete population directly affects the accuracy of ROU assets, lease liabilities, and related expenses.

Deloitte's Roadmap: Leases warns that "a lessee's failure to identify leases, including those embedded in service arrangements, is likely to lead to a financial statement error."¹ All leases other than short-term leases go on the balance sheet. So a key step in evaluating lease completeness is to understand the company's process for identifying potential leases, then test whether that process works. That includes checking non-lease contracts for embedded leases.

Auditors expect strong controls around contract review and a set method for finding contracts. An incomplete lease population carries real risks: material misstatements of financial statements, non-compliance with generally accepted accounting principles (GAAP), and restatements that can be costly.

Audit Assertion	Auditor Focus	Evidence Sought
Completeness	Are all contracts containing a lease identified and recorded? (Including embedded lease discovery)	Contracts register, AP listings, GL expense accounts, vendor agreements, review notes
Existence	Do recorded leases actually exist and belong to the entity?	Signed lease agreements, asset tags, payment evidence
Valuation/Allocation	Are ROU assets and lease liabilities calculated correctly?	Discount rate analysis, payment schedules, remeasurement calculations
Presentation/Disclosure	Are financial statement disclosures complete and accurate under ASC 842?	Footnote documentation, journal entries, policy notes

⚠️ Risk Alert: A common audit finding we see: a company overlooks service contracts that contain an identified asset and give the company control over its use for a period. This often leads to material misstatements.

Q: How do auditors test using ap data to identify unrecorded leases? Auditors usually review accounts payable vendor listings and general ledger expense accounts in detail. We look for recurring payments, large sums, or vendor descriptions that suggest access to or use of assets. We then select a sample of these payments and request the underlying contracts to assess for lease components, which is a key part of our lease identification audit work.

What an Incomplete Lease Population Costs You

Failing to find and record all leases, above all those embedded in other contracts, poses real risks under ASC 842. The biggest failure point is an incomplete lease population, which directly hurts the accuracy of financial reporting.

Understated ROU Assets and Lease Liabilities: This is the most direct result. If leases are missed, the balance sheet won't reflect the economic substance of the entity's rights and obligations. That skews key financial ratios and how stakeholders view the entity's financial health. Under ASC 842, a Right-of-use (ROU) asset is "an asset that represents a lessee's right to use an underlying asset for the lease term" (ASC 842 Master Glossary).
Non-Compliance with ASC 842 Disclosure Requirements: The standard requires lessees to disclose qualitative and quantitative information about their leases, the significant judgments made, and the amounts recognized (ASC 842-20-50-1). Missing leases means incomplete or inaccurate disclosures. Those can lead to audit qualifications or regulatory scrutiny.²
Material Weakness in Internal Controls: If a company cannot find and account for all its leases, that points to a weakness in internal controls over financial reporting. Stakeholders can read this as a bad sign, and it can raise audit costs.
Inefficient Use of Capital: Without a full picture of lease liabilities, management may make weaker choices about where to put capital. That can hold back growth plans or operating efficiency.

Scenario: ABC Corp., a manufacturer, signs a multi-year service agreement for specialized machinery. The agreement gives ABC Corp. exclusive use of one specific machine, identified by serial number. The machine sits at their facility, and ABC Corp. staff run it. For years, this was booked as an operating expense.

Under ASC 842, this is clearly an embedded lease, since ABC Corp. controls an identified asset for a period. Missing this embedded lease leaves the ROU asset and lease liability understated on their balance sheet, and the expense recognition pattern wrong. This oversight directly moves the company's debt-to-equity ratio, which their lenders watch closely. An ROU asset audit would certainly flag this.

🚨 Critical: Missing embedded leases can result in material misstatement. That means costly restatements and damage to a company's reputation. This is where using AP data to find unrecorded leases becomes vital.

Practical Checklist for Using AP Data to Identify Unrecorded Leases

AP data is a rich source for finding possible leases. We've found this checklist invaluable for a step-by-step review of AP records for ASC 842 compliance. It is a sound way to find embedded leases in contracts.

Step	Action Item	Details for Execution
1	Extract AP Vendor Spend Data	Pull detailed annual or quarterly AP transaction data. Focus on recurring payments over a set threshold (say, $5,000) for service or rental-type vendors. Include vendor name, invoice description, payment amount, frequency, and G/L account.
2	Identify High-Risk Keywords & Vendors	Search invoice descriptions and vendor names for terms like "rent," "lease," "equipment rental," "storage," "fleet," "maintenance," "data center," "copier," "scaffold," "transport," or specific asset types (e.g., "forklift," "server"). Target recurring vendors with varied or vague descriptions.
3	Analyze Recurring Payments without Fixed Assets	Find recurring payments to vendors where no matching fixed asset sits on the balance sheet. For example, monthly payments to a "machine services" vendor should prompt a closer look at the underlying agreement.
4	Review General Ledger Accounts	Comb through expense accounts like "rent expense," "equipment rental," "vehicle expense," "warehouse expense," "IT services," or "maintenance contracts." Any large or recurring balance warrants contract review.
5	Investigate Anomalous Payment Schedules	Look for payments with unusual patterns (e.g., the same large amount paid monthly for several years). These may point to a long-term contractual obligation for asset use.
6	Request Underlying Contracts	For the high-risk transactions you found, request the full underlying vendor agreements or contracts. Don't rely on summary invoices alone; the devil's in the details.
7	Perform Lease Assessment	Check each contract you receive against the ASC 842 definition of a lease: Does it convey the right to control the use of an identified asset for a period of time in exchange for consideration? Confirm two things. First, that there is an identified asset. Second, that the customer has both the right to obtain substantially all of the economic benefits from use of that asset and the right to direct its use throughout the period of use (ASC 842-10-15-4). Protective rights in the contract, such as limits on where or when the asset is used or required operating practices, typically define the scope of the customer's right of use. On their own they do not prevent the customer from having the right to direct the use of the asset (ASC 842-10-15-23). According to FASB ASC 842-10-15-3, a contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
8	Document Findings & Update Lease Register	For every lease you find, make sure it is documented, classified, and added to the company's central lease accounting system or register.

💡 Key Takeaway: The completeness assertion is one of the most closely checked areas in an ASC 842 audit. Reviewing AP data ahead of time makes your position much easier to defend.

Confirming Completeness With Procurement and Legal

Validation is key to showing effective internal controls and accurate financial reporting. After using AP data to find unrecorded leases, accounting teams must have a set process to confirm the completeness of their lease population. That means finding possible leases and then testing each one with care against the ASC 842 criteria.

Cross-Functional Review: Work with procurement, operations, and IT. These teams often started the contracts or are the main users of the assets under them, and they can add useful context on existing agreements. For more guidance, review the ASC 842 audit readiness checklist.
Regular Reconciliation: Reconcile your lease register to the relevant general ledger accounts (e.g., rent, equipment rental) on a set schedule. Any large variance should trigger a closer look.
Third-Party Lease Software: Put in purpose-built lease accounting software. These platforms often include strong contract intake and workflow tools. Those help you find and manage leases with less effort, and they give you a single source of truth for lease accounting compliance.
Policy and Procedure Documentation: Write down the process for finding, assessing, and recording leases, including the exact steps for reviewing AP data. This shows a well-defined control environment.
Sampling and Retesting: Select a sample of high-value vendor contracts (both leases you found and contracts first judged not to be leases) and re-perform the lease assessment. Sample sizes follow your audit methodology; the AICPA's audit and assurance resources are the starting point. This helps confirm that the first review worked.

Q: How do I find unrecorded leases using accounts payable data? To find unrecorded leases, focus on recurring payments in AP data, above all to vendors you would not normally link to asset purchases. We look for vague invoice descriptions, large payments with no clear asset on the balance sheet, or payments to vendors known for equipment services rather than outright sales.

Which G/L Accounts to Search Beyond Rent Expense

Even with strong processes, companies can fall into common traps when using AP data to find unrecorded leases. Knowing these pitfalls is key to a successful ASC 842 audit.

Common Mistake	Best Practice for Avoidance
Focusing only on "Lease Expense" G/L accounts.	Expand review to relevant expense accounts: Go through "Rent Expense," "Equipment Rental," "IT Services," "Maintenance Contracts," "Office Expenses," and "Warehouse Expenses" in detail. We've found many embedded leases live here. Remember that using AP data to find unrecorded leases includes payment histories and GL detail.
Assuming service contracts cannot contain leases.	Train staff on embedded lease identification: Teach procurement and accounting staff the ASC 842 definition of a lease. Stress the "identified asset" and "right to control" criteria. An embedded lease is a lease component inside a larger contract that may not be labeled as a lease.
Relying solely on keyword searches in invoice descriptions.	Combine keyword searches with vendor analysis and payment patterns: Some descriptions are vague. Match payments to vendor types, and look for steady, large, or long-term payments that suggest ongoing asset use.
Not investigating contracts below a materiality threshold.	Establish a reasonable materiality for lease identification, but consider cumulative effect: Even small individual leases can become material in aggregate. Consider qualitative factors too. PwC's Leases guide notes that a lessee setting a capitalization threshold should weigh the effect on the footnote disclosures and on lease cost as well as on the face of the statements, which "could result in a lower capitalization threshold than would be determined based on the financial statement effects alone." A threshold for recognition is not a license to skip identification: find the lease first, then apply the policy. ³
Lack of a centralized contract repository.	Implement a robust contract management system: This gives you a single source of truth for all contractual obligations, so leases are easier to find and manage from day one. This supports effective lease management.

Example: A mid-sized tech company we worked with found nearly a dozen "server hosting" contracts through an AP data review. All had been expensed. Though labeled as services, the contracts named dedicated servers by serial number, gave the company exclusive use of them, and let the company decide what those servers were used for. Both parts of the control test in ASC 842-10-15-4 were met, so these were embedded leases.

Missing them would have led to an audit finding of an incomplete lease population and understated liabilities. This is a common audit finding. Auditors go looking for these "hidden" leases.

What a Systematic AP Review Process Looks Like

Companies that do well at using AP data to find unrecorded leases act early and follow a set method for lease accounting compliance. Their financial reporting is more accurate, and their audits run smoother, with fewer management letters and audit adjustments. This forward stance supports ongoing, robust lease completeness testing procedures.

A well-run process usually includes:

Proactive System Integration: AP systems link to the lease accounting platform or, at the least, export data for analysis on a set schedule. That allows monthly or quarterly reviews rather than a once-a-year exercise.
Trained Personnel: Accounting, procurement, and operations staff know ASC 842's lease definition well, so they can spot possible leases on the front line. We've found this investment in training cuts the cleanup work later by a lot.
Clear Policies and Procedures: Written guidelines cover contract review, lease assessment thresholds, and data analytics routines using AP data. These policies are applied the same way each time and audited internally on a set schedule.
Regular Review Cycles: Beyond the annual audit, management reviews AP spending each quarter for possible new leases or changes to existing agreements. This keeps the lease population accurate all year.
Audit Readiness: When auditors arrive, the company can hand over a reconciliation of its lease register to GL accounts and detailed AP analysis results. It can also produce the supporting contract documents for every lease found. The auditors guide to evaluate ASC 842 lease accounting compliance confirms this readiness.

✅ Best Practice: Companies that execute well keep up quarterly lease reviews backed by AP data analysis. That sharply cuts the risk of audit findings tied to completeness.

Building AP Review Into Your Close Routine

Confirming the completeness of your lease population is an ongoing process, not a one-time event. Controllers and accounting managers should set up routines to review source data, AP records above all, and catch possible unrecorded leases early. A sound method for using AP data to find unrecorded leases will make your financial reporting more accurate and your annual audit smoother.

Sources and further reading

Deloitte Audit & Assurance Services - Deloitte, Roadmap: Leases, 3.1 Introduction ↩
ASC 842-20-50-1, as quoted in Deloitte, Roadmap: Leases, 15.2 Lessee Disclosure Requirements ↩
PwC Audit Services - PwC, Leases guide, 4.2 Initial recognition and measurement (lessee) ↩

Using AP Data to Identify Unrecorded Leases

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