Essential Internal Controls for Successful Lease Accounting Implementation
Implementing new processes and internal controls is crucial for ensuring accurate and timely lease accounting under the new standards. Here are some key processes and controls to consider:
- Lease identification and inventory: Establish a process to identify and track all lease agreements, including embedded leases within service contracts or other arrangements. Maintain a comprehensive lease inventory with relevant information such as lease terms, payment schedules, and classification.
- Lease classification: Develop a consistent methodology for classifying leases as operating or finance leases based on the new accounting standards. Implement a review process to ensure lease classification is accurate and consistently applied.
- Lease measurement and calculations: Create a standardized process for calculating lease liabilities and right-of-use (ROU) assets, including determining appropriate discount rates and lease terms. Implement controls to ensure accurate and timely calculations.
- Journal entries and account reconciliations: Develop a process for recording lease-related journal entries and reconciling lease accounts in the general ledger. Implement periodic account reconciliations to verify the accuracy of lease balances and transactions.
- Lease modifications and reassessments: Establish a process for identifying and accounting for lease modifications, such as changes in lease terms or payment amounts. Regularly reassess lease agreements for any changes that may require adjustments to lease accounting.
- Disclosure and reporting: Implement a process for preparing lease-related disclosures and reporting required under the new accounting standards. Ensure that the financial statements accurately reflect lease transactions and balances.
- Staff training and communication: Provide training and resources to accounting staff to ensure they understand the new lease accounting standards and can apply them accurately. Establish clear lines of communication to address questions and concerns related to lease accounting.
- Segregation of duties: Implement segregation of duties to minimize the risk of errors or fraud in lease accounting. For example, separate responsibilities for lease identification, measurement, and journal entry recording among different individuals.
- Periodic review and audit: Perform regular internal reviews or audits of lease accounting to ensure compliance with the new standards and identify areas for improvement. Address any identified issues or discrepancies promptly.
- Continuous improvement: Monitor changes in lease accounting standards, guidance, and best practices to ensure your company's processes and controls remain current and effective. Continuously refine and improve lease accounting processes and controls based on feedback, experience, and industry developments.
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