ASC 842 Close Process: Complete Monthly Checklist

Understanding ASC 842 close process: complete monthly checklist

The monthly close for lease accounting under ASC 842 is hard to get right, and it carries real audit risk. The standard is complex, so you need a firm, repeatable process. That process is what makes sure the financial statements show lease obligations and right-of-use assets the right way. This checklist gives controllers, accounting managers and auditors a practical way to run an efficient, compliant month-end for leases.

Sticking to the structure matters. The ASC 842 monthly close is the set of tasks you do each month. It carries lease data from the source contracts through the journal entries to a reconciled general ledger balance. Run the checklist well each month and you make fewer errors, get fewer audit findings, and can trust what you report.

For a complete breakdown, see our lease accounting guide.

What is ASC 842 Close Process: Complete Monthly Checklist Under ASC 842?

Q: What is the monthly closing checklist for ASC 842 lease accounting? A: The monthly closing checklist for ASC 842 lease accounting is a systematic series of steps designed to ensure the accurate and complete recognition, measurement, and disclosure of lease transactions in a company's financial statements at the end of each reporting period. It encompasses activities from identifying new leases to performing reconciliations and preparing journal entries.

What Auditors Check in Your Monthly Close

Auditors come at the ASC 842 close with three things in mind: completeness, accuracy, and proper presentation and disclosure. Their main goal is to obtain sufficient appropriate audit evidence about management’s assertions on lease accounting. In practice, they test three areas: internal controls (above all, those over the completeness assertion), the lease population, and the calculations for right-of-use (ROU) assets and lease liabilities.

The completeness assertion is the auditor's check that every transaction and account that should be recorded is in the financial statements. It matters most under ASC 842, because a lease nobody found can lead to a material misstatement.

Auditors test how well your controls work over lease identification, classification, measurement, and the ongoing accounting. They focus on how management finds new leases, modifications, and terminations, and how each event gets into the accounting system correctly. For example, 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." That is why a well-defined process for finding embedded leases and changes to lease terms matters ¹.

⚠️ Risk Alert: A common audit finding: the company overlooked service contracts with embedded leases, so lease liabilities and ROU assets are understated. That goes straight to the completeness assertion.

Q: How do auditors test ASC 842 close process? A: Auditors test the ASC 842 close process by examining documentation of control activities, performing substantive testing on lease populations and calculations, and corroborating management's assertions through external confirmations and analytical procedures. They often review a sample of contracts to confirm proper lease identification and classification.

Where the Lease Close Process Breaks Down

Strong lease close procedures, kept up month after month, are critical for ASC 842 compliance. Many risks can turn into serious audit findings and misstatements if the monthly close does not deal with them. Most of these risks come from unclear processes, weak technology, or too little training.

• Failure to identify all leases: This includes missing leases embedded in service or supply contracts, which auditors always test. A complete lease population is the foundation everything else rests on.
• Incorrect lease classification: Classifying a finance lease as an operating lease (or the reverse) can materially distort how the balance sheet and income statement are presented.
• Inaccurate discount rates: Using the wrong incremental borrowing rate or implicit rate misstates the ROU asset and lease liability (ASC 842-20-30-3). On a finance lease it also misstates interest expense. On an operating lease it shifts the split between liability accretion and ROU amortization inside the single lease cost (ASC 842-20-25-5 and 25-6).
• Errors in lease modification accounting: Changes to lease terms, such as extensions and contractions, and remeasurements triggered without a contract change, are complex and often mishandled. The result is calculation errors.
• Incomplete or inadequate documentation: Without a clear audit trail for lease decisions, calculations, and inputs, it is hard to support the balances and disclosures in the financial statements.
• Failure to test ROU assets for impairment: ASC 842-20-35-9 sends the lessee to ASC 360-10-35. The ROU asset is tested on its own only if its cash flows are independent; otherwise it is tested as part of the asset group whose cash flows it shares. When a triggering event occurs, compare the asset group's carrying amount to the undiscounted cash flows expected from its use and disposal. Only if it fails that test do you measure the loss, which is the excess of carrying amount over fair value (ASC 360-10-35-17). Teams miss this in the routine close because it is event-driven, not a monthly step. Grant Thornton's Applying ASC 360 to right-of-use assets (March 2020) walks through the test.
• Overlooking the ROU asset close procedures: This can lead to incorrect amortization, which makes the financial statements less accurate.

Example Scenario: A manufacturing company uses many third-party logistics (3PL) providers. Its warehousing and transportation contracts often include terms on dedicated space, named equipment, and control over specific assets (e.g., forklift fleets). At first, the accounting team only picked up the outright building leases.

Then the auditor sampled the 3PL contracts and found several embedded lease discovery instances. In each one, the manufacturer had the right to control the use of identified assets (warehouse sections, specific trucks) for a period of time. The result was a material adjustment, because these embedded leases had not been recognized under ASC 842, and it hit both the balance sheet and income statement.

🚨 Critical: Missing embedded leases can result in a material misstatement and a major restatement of the financial statements, above all for companies with complex service agreements.

Practical Checklist for Monthly ASC 842 Close Process

This practical checklist for the ASC 842 monthly close gives you a structured path to accuracy and completeness. Each step matters for solid lease accounting compliance.

How to ensure lease completeness for ASC 842 compliance?

To ensure lease completeness, work through the steps below.

💡 Key Takeaway: A full checklist helps make sure no critical step gets missed. It gives you a clear roadmap for the month's lease accounting work.

How to Prove the Close Was Performed

Validation is a critical part of the ASC 842 monthly close. Accounting teams need set procedures, in place ahead of time, to confirm that their lease accounting results are accurate and complete. That means checking the calculations, and also checking the data and assumptions under them. The strongest validation uses the same testing methods the auditors use, so management's assertions hold up when tested.

To validate well, organizations should:

1. Perform periodic reviews of contract populations: Monthly new lease identification is not enough. Each quarter or each year, review vendor contracts, purchase orders, and capital expenditure requests to find any embedded leases you missed. This supports effective lease identification testing.
2. Reconcile lease data to broader systems: Compare the data in the lease accounting system with property ledgers, fixed asset registers, and general ledger accounts, and make sure they agree.
3. Review discount rate appropriateness: Reassess the incremental borrowing rate (IBR) or implicit rate used for new leases on a regular basis, above all when interest rates are moving. Document the method and inputs used to set the IBR.
4. Conduct "what-if" analyses for modifications: Before you process a significant lease modification, model its impact. That way you understand the accounting entries it will produce and can check that they are right.
5. Maintain comprehensive audit documentation: This means abstraction summaries, discount rate support, journal entries, reconciliation workpapers, and management review sign-offs. Auditors lean hard on complete audit evidence to support balances.
6. Seek external validation: Consider bringing in third-party specialists for an independent review of the complex lease accounting areas, or for a general health check of the ASC 842 implementation.

Entities are responsible for putting in place appropriate internal controls over financial reporting so that they comply with the reporting standards. That includes controls over the whole lease accounting lifecycle.

Q: How to identify embedded leases in contracts? A: To identify embedded leases, scrutinize service contracts or purchase agreements for the right to use an identified asset, control over its use, and a specific period of use (ASC 842-10-15-3). Look for clauses granting exclusive use of equipment, dedicated space, or options to extend or control the asset's operation.

Common Close Errors and How to Avoid Them

Even with a checklist, some pitfalls trip up organizations during the ASC 842 monthly close again and again. Know these mistakes and put guards in place against them. That is what makes for a smooth close and a clean audit.

Example: A mid-sized retail company tracks its leases in a spreadsheet. When a lease is modified (e.g., an early termination option is exercised), a junior accountant updates the spreadsheet by hand and prepares the journal entries. A common audit finding was that the close entries were often wrong or incomplete, missing critical adjustments to the ROU asset or lease liability. The result was a material misstatement of both the balance sheet and income statement.

The best practice would be specialized lease accounting software. It automates these complex calculations and leaves an auditable trail, which makes such errors far less likely.

🚨 Critical: Handling complex lease modifications by hand is a major risk, and it often leads to incorrect financial reporting.

Q: What are common findings from the ASC 842 monthly close? A: Common audit findings include incomplete lease populations, incorrect discount rate application, erroneous lease modification accounting, and insufficient supporting documentation for ROU asset and lease liability balances.

What a Clean Monthly Lease Close Looks Like

A well-run ASC 842 monthly close does more than keep you compliant. It makes the close faster and gives you more confidence in what you report. Organizations that do this well take a proactive, integrated approach to lease accounting. They use technology, and they put teamwork across functions first.

• Integrated systems: High-performing organizations use specialized lease accounting software that connects to their Enterprise Resource Planning (ERP) system. This automates calculations, journal entries, and reconciliations, so there is less manual work and fewer errors.
• Proactive lease administration: These entities run one central process to identify, abstract, and manage leases across their whole lifecycle. New leases are identified at contract inception, not just when payments begin.
• Dedicated resources: They assign specific accounting professionals, or a team with lease accounting expertise, to run the monthly close. That keeps specialized knowledge applied the same way every month.
• Clear internal controls: Strong internal controls are built into the lease accounting process, from data input through to ledger reconciliations. These controls are reviewed and tested on a regular basis.
• Comprehensive documentation: Every lease decision, calculation, and reconciliation is documented with care and ready for review. That makes the audit go faster.

Consider a multi-national technology firm with over 500 leases globally. Through strong execution, it put in a central lease accounting platform that automates the monthly calculations and journal entries. Its procurement and legal teams must submit every new contract for lease accounting compliance review before it is signed.

Auditors on an engagement like that can trace transactions, test the completeness of the lease population and verify balances with far less back-and-forth.

✅ Best Practice: Organizations with strong execution keep up quarterly lease reviews and regular reconciliations, and they use technology to streamline the process and protect data integrity.

Where to Go From Here on the Lease Close

Improving your organization's ASC 842 monthly close is never finished. It takes steady work and a watchful eye. Focus on process discipline, good use of technology, and strong internal controls, and you can make your lease accounting more accurate and more efficient. Review your current close procedures against this checklist and note where they fall short.

Consider tools that automate lease accounting, so there is less manual work and better data integrity.

Related Articles

• Guide to Lease Population Completeness
• Auditor's Guide to Evaluating ASC 842 Compliance
• Implementing Top 10 Lease Accounting Internal Controls
• ASC 842 PBC List Guide