ASC 842 PBC List: Complete Documentation Guide: A Complete Guide

ASC 842 compliance introduces significant complexities for financial reporting, making robust preparation essential for audit success. An ASC 842 PBC list: complete documentation guide is defined as the assurance that all contracts meeting ASC 842's definition of a lease have been identified, evaluated, and recorded in the organization's financial statements. Failure to meticulously prepare this documentation can lead to extensive audit delays, increased costs, and potential financial restatements. This guide offers controllers, accounting managers, and auditors a practical framework to navigate the audit process effectively. It addresses the critical need for comprehensive documentation, ensuring that all aspects of lease accounting compliance are met, from initial identification to complex remeasurements. Organizations must proactively gather and organize specific information to demonstrate compliance and facilitate a smooth ASC 842 audit. This preparation is crucial for mitigating risks associated with an incomplete lease population and ensuring the accuracy of financial reporting.

What Auditors Are Actually Looking For in ASC 842

Auditors approach ASC 842 audit procedures with a focus on several key assertions, primarily completeness, accuracy, and existence. They are seeking evidence that management has applied the standard correctly and consistently. The completeness assertion is one of the most scrutinized areas, verifying that all lease contracts, including those with embedded lease discovery, are identified and properly accounted for. Auditors typically look for a comprehensive inventory of contracts, detailed lease abstractions, and the underlying data used for calculations. This includes understanding the entity's process for identifying leases and assessing control over that process.

✅ Best Practice: Companies should establish a robust internal control framework for lease accounting, covering identification, measurement, and ongoing reporting. This framework provides evidence of a systematic approach to compliance.

Auditors will also perform lease audit procedures to validate the accuracy of calculations, such as the present value of lease payments, implicit interest rates, and the subsequent measurement of right-of-use (ROU) assets and lease liabilities. They examine the judgments made regarding lease term, discount rates, and lease components. The audit process often involves detailed walkthroughs of the lease accounting system or process, inquiries with management, and substantive testing of lease balances and transactions.

Q: How do auditors test asc 842 pbc list: complete documentation guide? A: Auditors will primarily test the ASC 842 PBC list: complete documentation guide through a combination of inquiry, inspection, re-performance, and recalculation. They scrutinize the completeness of the lease population, the accuracy of lease classifications, and the underlying data supporting ROU asset and lease liability balances. They also evaluate the design and operating effectiveness of internal controls related to lease accounting.

Deloitte emphasizes that a proactive approach to audit readiness is critical, stating that companies should anticipate auditor skepticism regarding lease identification and the accuracy of underlying data¹.

Key Audit Focus Areas for ASC 842

Key Risks and Failure Points

Ignoring the meticulous preparation for an ASC 842 audit can expose companies to significant financial and reputational risks. One of the most prevalent risks is the failure to identify all leases, leading to an understatement of ROU assets and lease liabilities. This often stems from decentralized contract management or a lack of standardized processes for embedded lease discovery.

⚠️ Risk Alert: A common audit finding relates to companies overlooking service contracts with embedded leases, resulting in material misstatements and necessitating costly audit adjustments.

Another critical area is the incorrect application of the lease accounting model, particularly in determining the lease term or the appropriate discount rate. Errors here can significantly impact the initial and subsequent measurement of lease balances. An ROU asset audit often uncovers discrepancies where companies have failed to adequately assess impairment or modify lease terms correctly.

Scenario: Incomplete Lease Population

Scenario: A manufacturing company has 50 identified real estate leases and 100 equipment leases. During the ASC 842 audit, the auditors review general ledger expense accounts and identify significant payments to a third-party logistics provider. Further inquiry reveals that this provider leases a dedicated warehouse space and specialized forklifts exclusively for the manufacturing company's use, with the manufacturing company having the right to control their use for a defined period. These contracts were never identified as leases.

Key Takeaway: This scenario demonstrates the significant risks of incomplete lease population and highlights the importance of thorough contract review, involving procurement and legal teams, to ensure lease identification audit completeness. The failure to identify these embedded leases would result in a material misstatement on the financial statements and significant audit deficiencies.

Practical Checklist for ASC 842 Preparedness

Having a well-organized PBC (Prepared By Client) list is paramount for a smooth ASC 842 audit. This list serves as a roadmap for both the client team and the auditors, ensuring all necessary documentation is provided promptly and efficiently.

What Documentation Is Required for ASC 842?

To prepare a PBC list for ASC 842 compliance, prioritize identifying, abstracting, and calculating all lease data. A complete ASC 842 PBC list: complete documentation guide will include both overarching policy documents and specific lease-related data. Our article on ASC 842 Audit Readiness Checklist provides a detailed overview.

How to Identify Embedded Leases in Contracts

An embedded lease refers to a lease component contained within a larger contract that may not be explicitly identified as a lease. To identify these, organizations should:

1. Review all service and supply contracts: Especially those involving equipment, vehicles, or dedicated space.
2. Look for direct control: Does the company direct how and for what purpose an identified asset is used?
3. Check for an identified asset: Is there an explicit or implicitly specified asset within the contract?
4. Assess economic benefit: Does the company obtain substantially all the economic benefits from the use of the asset?

💡 Key Takeaway: Implement a cross-functional review process involving procurement, legal, and accounting to catch embedded leases.

How Accounting Teams Should Validate Their Approach

Validation is a continuous process, not a one-time event. Accounting teams must establish repeatable steps to ensure the accuracy and completeness of their ASC 842 implementation. This involves more than just data collection; it requires a deep understanding of the standard and its application.

The completeness assertion refers to an auditor's objective to verify that all transactions and accounts that should be recorded have been included in the financial statements. To validate this for leases, accounting teams should:

• Perform periodic reconciliations: Compare the lease system or spreadsheet data to general ledger balances. Investigate and resolve any discrepancies.
• Conduct expense account reviews: Systematically review expense accounts for payments that suggest the presence of unrecorded leases (e.g., rent, equipment rental, vehicle payments).
• Engage with other departments: Regularly communicate with procurement, legal, and facilities management to identify new contracts or changes to existing ones that may contain leases. This helps ensure comprehensive lease identification audit processes are in place.

Right-of-use (ROU) asset is defined as an asset that represents a lessee's right to use an underlying asset for the lease term under ASC 842. To validate ROU asset and lease liability calculations:

1. Re-perform key calculations: Select a sample of leases and independently recalculate initial recognition and subsequent amortization/accretion. Check for consistency with the system output.
2. Scrutinize discount rates: Ensure the incremental borrowing rate used is adequately supported and consistently applied based on the lease term and asset class. According to FASB ASC 842-20-30-3, the rate implicit in the lease should be used if readily determinable; otherwise, the lessee’s incremental borrowing rate should be used.
3. Review lease modifications: Validate that any lease modifications or reassessments have been correctly processed and impact ROU assets and lease liabilities as required. Our article on Lease Management Documentation Compliance offers further guidance.

✅ Recommended: Implement a secondary review process for all significant lease accounting entries and judgments to catch potential errors before the audit.

Common Mistakes and How to Avoid Them

Even well-intentioned teams can make significant errors in ASC 842 implementation, leading to extensive questions during the audit. Understanding these pitfalls is the first step toward effective remediation.

What are common ASC 842 PBC list: complete documentation guide audit findings?

🚨 Critical: Common audit findings include undetected embedded leases, inaccurate discount rate application, and failure to properly account for lease modifications, all stemming from an inadequate ASC 842 PBC list: complete documentation guide controls.

Q: What documentation is required for asc 842 pbc list: complete documentation guide? A: The required documentation for an ASC 842 PBC list: complete documentation guide spans internal policies, all lease contracts and amendments, detailed abstraction summaries, amortization schedules, journal entries, and support for key estimates like discount rates. It must demonstrate all leases have been identified, measured, and disclosed per the standard.

What Strong Execution Looks Like in Practice

Strong execution in ASC 842 audit readiness means more than just avoiding audit findings; it leads to a more efficient, less disruptive audit process. Organizations that excel in this area integrate lease accounting into their core financial operations and controls.

A well-executed ASC 842 PBC list: complete documentation guide results in:

• Fewer audit questions and follow-ups: Auditors receive comprehensive, well-indexed documentation, reducing the need for extensive inquiries.
• Timely audit completion: The organized nature of the PBC list enables auditors to perform their procedures efficiently, staying within agreed-upon timelines.
• Increased confidence in financial statements: Management has a clear, documented trail of all lease accounting judgments and calculations, strengthening internal and external stakeholder trust.
• Reduced audit fees: Less auditor time spent on remediation and extensive testing directly translates into cost savings.

Consider an organization that has implemented a dedicated lease accounting software solution. All lease contracts are abstracted into the system, which automatically generates amortization schedules, reconciles to the general ledger, and produces draft disclosure reports. This level of automation and control significantly strengthens the lease accounting compliance effort.

Scenario: Seamless Audit Experience

A technology company with over 300 leases implemented a centralized lease management system two years before their first full ASC 842 audit. They maintained real-time updates for all lease modifications and regularly reconciled system output with their general ledger. When the auditors requested the ASC 842 PBC list: complete documentation guide, the company provided access to their lease system, along with pre-generated reports for lease population, amortization schedules, and detailed journal entries. The audit team could easily verify lease data, re-perform calculations, and trace transactions. This strong execution led to a clean audit opinion on their lease accounting in just three weeks, with minimal follow-up requests. The company's proactive approach significantly reduced audit stress and resource allocation.

Next Steps

To proactively prepare for your ASC 842 audit, consider reviewing your current lease inventory and internal control environment. Ensure your team understands the specific requirements and documentation expectations. For further insights and resources, explore the following:

• Preparing for ASC 842 Audits
• Guides to Successfully Complete an ASC 842 Lease Accounting Audit
• Ultimate Guide to ASC 842 Lease Accounting