Mastering ASC 842 Lease Remeasurement Triggers
The transition to ASC 842 has presented significant challenges for lessees, particularly concerning the ongoing management of lease portfolios. A critical aspect of ASC 842 compliance is understanding and correctly applying remeasurement triggers under ASC 842: complete checklist. This process is vital for maintaining accurate financial reporting and avoiding material misstatements. Failing to properly identify and act upon these triggers can lead to audit deficiencies and restatements. Remeasurement triggers under ASC 842: complete checklist 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.
Q: What are the common remeasurement triggers under ASC 842? A: Common remeasurement triggers include lease modifications, changes in lease term, changes in the likelihood of exercising options, changes in index or rate, and certain reassessments of residual value guarantees. These events necessitate recalculating the lease liability and the corresponding right-of-use (ROU) asset to reflect the revised lease economics, ensuring the financial statements remain current and compliant. Further details on these triggers are outlined in this guide, which also provides a comprehensive ultimate guide to ASC 842 lease accounting.
What Auditors Are Actually Looking For
Auditors approach lease accounting under ASC 842 with a focus on several key assertions, primarily completeness, accuracy, and valuation. They need assurance that all leases are captured, correctly classified, and accurately measured. 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. This is particularly challenging for leases given the potential for embedded lease discovery within service contracts.
Auditors will examine internal controls over the lease accounting process, from initial identification to subsequent remeasurement. This includes reviewing policies for lease vs. non-lease component separation, discount rate determination, and monitoring for events that trigger remeasurement. [Deloitte's audit guidance1] emphasizes the importance of robust processes for identifying all lease components and monitoring changes that could impact their accounting treatment. They expect detailed documentation supporting every accounting decision and calculation.
Key Audit Focus Areas for Remeasurement
| Audit Focus Area | Description | Key Evidence Auditors Seek |
|---|---|---|
| Completeness of Triggers | Verification that all events requiring remeasurement have been identified and processed. | Policy for monitoring lease changes, review of contract amendments. |
| Accuracy of Remeasurement | Recalculation verification of lease liability and ROU asset after a trigger. | Discount rate support, recalculation models, journal entries. |
| Documentation & Disclosure | Evidence supporting the basis for remeasurement and proper financial statement disclosure. | Lease schedules, accounting memos, disclosure footnotes. |
| Internal Controls | Assessment of controls ensuring timely and accurate identification and processing of remeasurement events. | Control narratives, testing of control effectiveness. |
Q: How do auditors test remeasurement triggers under ASC 842: complete checklist? A: Auditors test remeasurement triggers by reviewing lease agreements, contractual amendments, and company policies. They will select a sample of modified leases and independently recalculate the lease liability and ROU asset, comparing their results to management's figures. They also scrutinize management's process for identifying triggers and assessing the impact on the financial statements.
⚠️ Risk Alert: A common audit finding relates to companies overlooking service contracts containing an embedded lease, leading to an incomplete lease population and non-compliance with ASC 842. This often results from inadequate lease identification testing procedures.
Key Risks and Failure Points
Failure to properly manage remeasurement triggers under ASC 842: complete checklist poses significant financial reporting risks. The complexities of ASC 842 mean that even minor oversights can lead to material misstatements, requiring costly restatements and damaging organizational credibility.
- Incomplete Identification of Triggers: Many organizations struggle to establish a systematic process for identifying all events that necessitate remeasurement. This includes subtle changes in a contract's terms or a reassessment of a future option, leading to uncorrected balances.
- Incorrect Calculation of Revised Balances: Misapplying the remeasurement guidance, such as using an outdated discount rate or failing to properly allocate payments between lease and non-lease components, can lead to inaccurate lease liabilities and ROU asset compliance figures.
- Lack of Timely Recognition: Delaying the recognition of a remeasurement event beyond the effective date can result in financial statements that do not accurately reflect the organization's financial position and performance.
- Insufficient Documentation: Lack of clear, concise documentation explaining the rationale for a remeasurement event, the inputs used, and the calculations performed is a frequent audit finding. Auditors rely on this evidence to validate management's assertions.
- Overlooking Embedded Leases: A significant risk lies in the failure to identify what are the risks of incomplete lease population due to undetected embedded leases within broader service arrangements. These often go unnoticed until an audit, leading to substantial adjustments.
Calculation Example: Lease Remeasurement Due to Term Change
Scenario: A lessee has a 5-year lease with an initial lease liability of $250,000. At the end of year 2, the lessee exercises an option to extend the lease term by an additional 3 years. The present value of the remaining 3 years of the original lease payments plus the present value of the 3-year extension payments, discounted at the revised incremental borrowing rate, is $300,000. The carrying amount of the ROU asset at the remeasurement date was $180,000.
| Component | Value | Calculation |
|---|---|---|
| New Lease Liability | $300,000 | Present value of revised lease payments (original remaining + extension) |
| Old Lease Liability | $150,000 | Remaining balance from initial calculation |
| Increase in Lease Liability | $150,000 | $300,000 - $150,000 |
| Old ROU Asset Carrying Amt | $180,000 | From previous balance sheet |
| Increase in ROU Asset | $150,000 | Equal to increase in Lease Liability (assuming no other changes affecting ROU asset) |
Key Takeaway: The increase in lease liability directly impacts the ROU asset, ensuring the balance sheet remains in equilibrium. This underscores the need for precise calculations during remeasurement.
Practical Checklist for ASC 842 Remeasurement Triggers
This checklist provides a structured approach for accounting teams to manage and execute lease remeasurements under ASC 842. Using this can help answer questions like "Siri, how do I know when to remeasure a lease according to ASC 842?"
✅ Best Practice: Proactive monitoring and a clear workflow are essential for effective management of lease remeasurement events. Organizations with strong execution maintain quarterly lease reviews to identify potential triggers early.
Remeasurement Triggers Under ASC 842: Complete Checklist
| Checklist Item | Description |
|---|---|
| 1. Lease Modification (ASC 842-10-25-8) | What is remeasurement triggers under asc 842: complete checklist under ASC 842? Occurs when there's a change in the scope of a lease (right to use one or more underlying assets) or the consideration for a lease that was not part of the original terms and conditions. This includes additions, removals, or extensions of the right to use. Requires reassessment of classification and remeasurement. |
| 2. Change in Lease Term (ASC 842-10-35-1) | Occurs when there is a change in the noncancellable period of the lease, such as exercising or not exercising a renewal or termination option that was previously included or excluded from the lease term. The likelihood of exercising contingent options must be reassessed if there's a significant event or change in circumstances. |
| 3. Change in Lease Payments (ASC 842-10-35-5) | Changes in future lease payments resulting from a change in an index or a rate (e.g., CPI, LIBOR, prime rate). This requires remeasurement using the updated index/rate, with the discount rate generally remaining unchanged unless the original discount rate was explicitly tied to that index. |
| 4. Change in Residual Value Guarantee | A change in the amount probable of being owed by the lessee under a residual value guarantee. This necessitates remeasurement of the lease liability. |
| 5. Partial Termination | Occurs when the lease scope is reduced (e.g., reducing the square footage of leased property). This is treated as a partial modification and partial termination. The ROU asset is proportionally reduced, and any resulting gain or loss is recognized. |
| 6. Changes in Likelihood of Options | A reassessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset or to extend or terminate the lease, if the change is due to events within the control of the lessee and not solely related to a change in market conditions (e.g., a strategic decision to stay longer). |
"What documentation is required for remeasurement triggers under asc 842: complete checklist?" This includes the original lease contract, all amendments, calculations for revised lease liability and ROU asset, and an accounting memorandum explaining the remeasurement event and its impact.
How Accounting Teams Should Validate Their Approach
Validation is key to ensuring lease accounting compliance. Accounting teams must implement robust procedures to confirm that all required remeasurements are identified, processed correctly, and adequately documented. This begins with having a centralized lease management system capable of tracking key lease terms and alerting about upcoming options or changes.
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. The accurate valuation and subsequent remeasurement of the ROU asset are paramount. Teams should establish a clear documented process for monitoring contracts for events that trigger remeasurement. This includes a review of new contracts for embedded lease discovery, which may be hidden within service agreements, creating a potential exposure if not properly identified and accounted for. A systematic approach helps answer "how to identify embedded leases in contracts."
Validation steps include:
- Reconciliation: Periodically reconcile the lease schedule to the general ledger to ensure all ROU assets and lease liabilities are properly recorded and updated.
- Sample Testing: Conduct internal sample testing of remeasurement entries, similar to an auditor's approach, to verify calculations and supporting documentation.
- Cross-Functional Review: Engage legal, procurement, and operations teams to review contracts and identify any changes or new agreements that might contain lease components or trigger remeasurements.
- Policy Adherence: Verify adherence to the organization's established lease accounting policy, especially concerning the determination of the incremental borrowing rate (IBR) and the treatment of non-lease components. The AICPA provides guidance on internal controls for financial reporting, which extends to lease accounting processes2.
Common Mistakes and How to Avoid Them
Even with detailed guidance, organizations frequently make errors in applying remeasurement triggers under ASC 842: complete checklist controls. These mistakes often lead to what are common remeasurement triggers under asc 842: complete checklist audit findings, impacting audit efficiency and potentially requiring adjustments.
Remeasurement Mistakes and Best Practices
| Common Mistake | Best Practice to Avoid | Audit Finding Implications |
|---|---|---|
| 1. Missing Lease Modifications | Implement a centralized contract management system and a robust process to track all contract amendments and new agreements. Conduct regular training for procurement teams on identifying potential lease modifications. | Understated lease liability and ROU asset, non-compliance with ASC 842 disclosure requirements. |
| 2. Incorrect Discount Rate After Remeasurement | Always use the lessee's incremental borrowing rate (IBR) at the remeasurement date, unless the modification is a change in an index or rate. Document the IBR calculation and its justification clearly. Refer to guidance on how to calculate incremental borrowing rate. | Misstated present value of lease payments, impacting both liability and ROU asset. |
| 3. Inappropriate Treatment of Partial Terminations | Clearly distinguish between partial terminations (scope reduction) and other modifications. Ensure the ROU asset is adjusted proportionally and any gain/loss is recognized. | Incorrect gain/loss recognition, overstatement of ROU asset. |
| 4. Lack of Clear Accounting Memo for Each Event | For every remeasurement, create a detailed accounting memorandum that outlines the trigger, inputs, calculations, accounting entries, and rationale. This serves as critical audit evidence. | Audit delays due to insufficient evidence, potential for auditor adjustments. |
| 5. Delays in Processing Remeasurements | Establish clear timelines and responsibilities for processing remeasurement events promptly upon identification. Integrate lease accounting into monthly or quarterly close processes. | Financial statements not reflective of current economic reality, potential for material misstatement at period-end. |
| 6. Ignoring Changes in Probability of Lease Options | Periodically reassess the likelihood of exercising extension or termination options, especially if significant events (e.g., strategic changes, relocation plans) occur. Document the rationale for the reassessment. | Inaccurate lease term, leading to incorrect amortization of ROU asset and interest expense on lease liability. |
🚨 Critical: Failure to identify and correctly apply these triggers can result in material misstatement of lease liabilities and ROU assets, leading to significant audit findings and potential restatements. The ASC 842 audit checklist for controllers often highlights these as key risk areas.
What Strong Execution Looks Like in Practice
Organizations demonstrating strong execution of ASC 842 remeasurement processes streamline their financial reporting and significantly reduce audit risk. This involves proactive management rather than reactive adjustments. Strong execution begins with a centralized, robust lease accounting software solution that automates calculations and flags potential remeasurement events.
Such an organization would have dedicated personnel trained in lease accounting compliance, equipped with clear policies and procedures. They consistently perform lease identification testing as part of their quarterly close to catch new leases and modifications early. Their documentation is comprehensive, detailing every decision point, especially around the incremental borrowing rate selection and the assessment of lease options. This proactive approach minimizes year-end surprises and enhances the credibility of financial reporting. A company that aligns its lease data with its general ledger seamlessly avoids issues often noted in top 10 year-end lease accounting challenges.
For example, a multinational manufacturing firm implemented a system that automatically pulled lease contract data, flagged upcoming option dates, and alerted the accounting team to any contract amendments. This allowed their team to process remeasurements within days of the event, ensuring that their financial statements were always up-to-date and accurate. The external auditors consistently commend their efficient process and thorough documentation, resulting in clean audit opinions on their lease balances.
Next Steps
To ensure robust lease accounting compliance and minimize audit risk, organizations should regularly review their processes for identifying and addressing remeasurement triggers under ASC 842: complete checklist. Investing in technology and continuous training for accounting professionals is paramount.
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