Mastering Completeness Testing for ASC 842 Lease Populations

For controllers, accounting managers, and auditors, ensuring the completeness of lease data is a critical aspect of ASC 842 audit compliance. Inaccurate or incomplete lease populations can lead to material misstatements, audit qualifications, and significant restatement costs. This is why robust completeness testing procedures for lease populations are paramount. The core problem is often not malicious intent, but rather the complexity of identifying all contracts that contain a lease under the new standard. Many organizations struggle with identifying what is completeness testing procedures for lease populations under ASC 842 due to the sheer volume and diversity of contractual agreements.

Completeness testing procedures for lease populations 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. Auditors aim to confirm that no material leases, whether explicit or embedded lease discovery, have been omitted, ensuring the financial statements present a complete and accurate picture of lease assets and liabilities. This article details the procedures, risks, and best practices for achieving lease population completeness, reflecting guidance from prominent accounting bodies and audit firms. Understanding ASC 842 lease accounting basics is essential before addressing completeness.

What Auditors Are Actually Looking For

Auditors approach lease completeness with a keen eye on assertions. 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. Specifically for leases, auditors want to know: "How do auditors check if all leases are included in the accounting records?" They are looking for evidence that the company has a systematic and robust process for identifying all leases and lease components. This includes both explicit lease agreements and potential embedded lease discovery.

"According to PwC's 'Applying ASC 842' guide, the auditor's review of completeness procedures should verify that management has identified all contracts containing a lease, including those not explicitly labeled as leases, across all departments and locations."¹

Auditors will apply various lease audit procedures to evaluate the effectiveness of management's controls over lease identification. This involves understanding the entity's business processes, internal controls, and data management systems. They will inquire about the sources of lease agreements, including procurement, real estate, IT, and transportation departments. Auditors apply substantive testing procedures to verify the accuracy of the lease population.

Key Audit Focus Areas for Lease Completeness

How do auditors test completeness testing procedures for lease populations?

Q: How do auditors test completeness testing procedures for lease populations?

A: Auditors test completeness by examining the client's internal controls over lease identification, performing substantive analytical procedures on accounts likely to contain leases, and executing substantive tests of details. This includes reviewing general ledger accounts, vendor payment reports, and fixed asset additions for potential unrecorded leases.

Key Risks and Failure Points

Incomplete lease populations pose significant what are the risks of incomplete lease population challenges. A primary risk is the omission of material right-of-use (ROU) asset and lease liability balances on the balance sheet. 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. This can lead to non-compliance with accounting standards and misrepresentation of a company's financial position and key financial ratios.

⚠️ Risk Alert: A common audit finding relates to companies overlooking service contracts with embedded leases, which can significantly understate balance sheet liabilities and assets.

Concrete Risks of Incomplete Lease Population

• Material Misstatement: Failure to recognize all leases under ASC 842 directly impacts the balance sheet and income statement, leading to an understatement of assets and liabilities. This can result in an audit finding or even a restatement.
• ROE Asset Audit Challenges: A proper ROU asset audit relies on complete data. If the underlying lease agreements are not fully identified, the subsequent valuation and classification of ROU assets and lease liabilities will be flawed, leading to audit deficiencies.
• Breach of Debt Covenants: Many debt agreements include covenants tied to balance sheet metrics (e.g., debt-to-equity ratios). Incomplete lease populations can result in an understatement of leverage, potentially triggering a technical default if not properly recognized.
• Restatement Costs: Discovering missing leases after financial statements have been issued often necessitates costly and time-consuming restatements, eroding investor confidence and requiring significant management attention.

Calculation Example: Impact of an Unidentified Lease

Scenario: A company fails to identify a 5-year equipment lease with annual payments of $50,000, discount rate of 5%.

Key Takeaway: An overlooked lease can lead to a material understatement of both lease liabilities and ROU assets, significantly impacting the balance sheet. This can directly result in material weaknesses and audit qualifications, as detailed in discussions around material weakness management in leases.

Practical Checklist for Lease Identification

Ensuring completeness requires a methodical approach to lease identification audit. This checklist provides a framework for identifying all potential leases within an organization, particularly useful for how to identify embedded leases in contracts.

Checklist for Lease Population Completeness

1. Define Scope and Centralize Responsibility:
   • Action: Assign a central team or individual responsible for lease accounting and completeness.
   • Why: Ensures consistency and accountability.
2. Conduct a Comprehensive Contract Inventory:
   • Action: Systematically review all contracts across departments (e.g., procurement, IT, real estate, fleet, facilities).
   • Why: Captures explicit and potential embedded leases.
3. Review General Ledger Accounts:
   • Action: Scrutinize accounts likely to contain lease payments (e.g., rent, equipment rental, service contracts, vehicle expenses).
   • Why: Identifies payments that might correspond to unrecorded leases.
4. Examine Vendor Master Files and Payment Data:
   • Action: Analyze vendor lists and payment histories for recurring payments to lessors or service providers that might indicate lease arrangements.
   • Why: Uncovers contracts not flagged as leases initially.
5. Utilize Fixed Asset Listings:
   • Action: Compare leased assets with owned assets. Investigate any assets in use but not owned.
   • Why: Confirms that all assets under a lease are properly recognized as ROU assets.
6. Create an Embedded Lease Identification Protocol:
   • Action: Develop a checklist or decision tree for evaluating service/supply contracts for embedded leases.
   • Why: Standardizes the complex process of embedded lease discovery.
7. Implement New Contract Review Procedures:
   • Action: Establish a workflow requiring all new contracts to be reviewed for lease components by the lease accounting team.
   • Why: Prevents new leases from being missed post-transition.
8. Reconcile with Prior Year Information:
   • Action: Compare the current lease population with prior periods, investigating significant changes or omissions.
   • Why: Ensures continuity and identifies potential missed leases since the last audit.

✅ Best Practice: Organizations with strong execution maintain quarterly lease reviews and integrate lease identification into their standard procurement and contract management processes.

How can I make sure my lease data is complete for an audit?

Q: How can I make sure my lease data is complete for an audit?

A: To ensure complete lease data for an audit, establish clear internal controls for identifying all contracts containing a lease, perform periodic reviews of general ledger accounts and vendor payments, and implement a robust system for tracking new and modified contracts, integrating these procedures into your overall ASC 842 audit readiness checklist.

How Accounting Teams Should Validate Their Approach

For accounting teams, validating that their lease identification process is comprehensive is crucial for lease accounting compliance. This means demonstrating to auditors that the process is not only designed well but also operating effectively. According to FASB ASC 842-10-15, 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. Accounting teams must be able to prove they've applied this definition consistently.

Validation involves documenting the entire process, from initial contract identification to the formal recording of the lease. For additional validation steps, see our lease documentation requirements.

Acceptable Evidence and Documentation

• Process Narratives and Flowcharts: Detailed descriptions of how contracts are identified, reviewed, and entered into the lease accounting system. This should include responsibilities and approval levels.
• Sampling Results: Evidence of contracts reviewed for embedded leases, including the identification checklist or decision tree used and the conclusions reached for each sample.
• Reconciliation Reports: Documentation reconciling contracts identified from various sources (e.g., GL accounts, vendor lists) to the final lease accounting schedule.
• New Contract Log: A register of all new contracts entered into during the period, indicating whether they contained a lease and the rationale.
• IT System Controls: Documentation of controls within any lease accounting software or enterprise resource planning (ERP) system that ensures data integrity and completeness.
• Training Records: Proof that personnel involved in contract review or lease accounting have received adequate training on ASC 842 lease identification criteria.

💡 Key Takeaway: The quality and availability of documentation are paramount. Auditors rely heavily on comprehensive documentation to assess the effectiveness of completeness procedures.

Common Mistakes and How to Avoid Them

Even with robust systems, companies often make avoidable mistakes during completeness testing procedures for lease populations controls. These errors can lead to audit scrutiny and potential adjustments.

🚨 Critical: Failure to identify embedded leases can result in material misstatement and is a frequent point of contention in an ASC 842 audit. What are common completeness testing procedures for lease populations audit findings often center on these overlooked agreements. An ASC 842 PBC list guide can help reduce findings.

What Strong Execution Looks Like in Practice

Strong execution in lease completeness testing translates directly into fewer audit findings, a smoother audit process, and greater confidence in financial reporting. It’s about more than just checking boxes; it's about embedding a culture of vigilance and accuracy. Lease accounting compliance is an ongoing process, not a one-time event.

Example: A Well-Prepared Organization

Consider 'TechSolutions Inc.', a company with a global footprint. Their accounting team, in collaboration with IT and procurement, implements a comprehensive approach to lease completeness:

1. Centralized Contract Repository: All contracts are stored in a single system, tagged with keywords indicating potential lease components.
2. Automated GL Scans: A quarterly automated scan of specific GL accounts (e.g., 'rent expenses – non-real estate,' 'equipment service fees') flags unusual or large recurring payments for manual review.
3. Cross-Functional Review: New procurement contracts over a certain threshold (e.g., $5,000 annually) are automatically routed to the lease accounting team for review before final approval. Procurement and legal teams are also trained on identifying lease indicators.
4. Period-End Reconciliation: Before closing the books each quarter, the lease accounting team reconciles the current lease population in their lease management software against a master list sourced from GL, fixed assets, and newly executed contracts. Any discrepancies are investigated and resolved.
5. Documentation: All review checklists, reconciliations, and decisions regarding lease vs. non-lease components are meticulously documented and readily available for audit.

This proactive and integrated approach significantly reduces the risk of missed leases, streamlines the ASC 842 audit, and provides assurance that the financial statements are materially complete regarding lease assets and liabilities. This approach also helps how to ensure lease completeness for ASC 842 compliance.

Next Steps

Achieving and maintaining completeness in your lease population requires continuous effort and robust internal controls. Focus on building systematic processes for identifying, evaluating, and documenting all contracts that might contain a lease. This proactive approach will not only stand up to auditor scrutiny but also provide a more accurate financial picture of your organization.

Related Articles

• Guides to Successfully Complete an ASC 842 Lease Accounting Audit
• Preparing for ASC 842 Audits
• Implementing Lease Accounting Internal Controls
• Lease Population Completeness