Completeness Testing Procedures for Lease Populations

Mastering Completeness Testing for ASC 842 Lease Populations

Controllers, accounting managers and auditors all need lease data that is complete. It is a core part of ASC 842 audit compliance. A lease population that is wrong or has gaps can lead to material misstatements, audit qualifications and large restatement costs. That is why strong completeness testing matters so much.

The root cause is often not bad intent. It is hard to find every contract that contains a lease under the new standard. Many companies struggle to build the full lease population because they hold so many contracts, of so many kinds.

Completeness testing procedures for lease populations are the tests that show whether the company has captured every contract that contains a lease. They reconcile the lease population to contracts, vendor payments and general ledger accounts.

Auditors aim to confirm that no material lease has been left out. That holds for explicit leases and for those found through embedded lease discovery. The goal is financial statements that give a complete and accurate picture of lease assets and liabilities.

This article sets out the procedures, the risks and the best practices for a complete lease population. It draws on the FASB Codification and on published guidance from PwC, KPMG and Deloitte, cited under Sources and further reading. You need to know the ASC 842 lease accounting basics before you turn to completeness.

What Auditors Do to Test Lease Completeness

Auditors look at lease completeness with a keen eye on assertions. The completeness assertion is the auditor's objective to verify that the financial statements include all transactions and accounts that should be recorded. For leases, auditors want to know one thing: "How do auditors check if all leases are included in the accounting records?"

They look for evidence that the company has a systematic and robust process to find all leases and lease components. That covers both explicit lease agreements and embedded lease discovery for leases that may hide in other contracts.

PwC's Leases (ASC 842) guide, section 2.3, says that "a reporting entity should consider all of the terms of an arrangement to determine whether it contains a lease. This often requires input from individuals across the entity, including, but not limited to, procurement, legal, engineering, manufacturing, and information technology."¹

Auditors will apply various lease audit procedures to test how well management's controls over lease identification work. To do that, they learn the entity's business processes, internal controls and data management systems. They ask where lease agreements come from, including the 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. They also perform substantive analytical procedures on accounts likely to contain leases, and they run substantive tests of details. This includes a review of general ledger accounts, vendor payment reports and fixed asset additions for potential unrecorded leases.

Where Completeness Testing Misses Leases

An incomplete lease population poses significant risks. A primary risk is that material right-of-use (ROU) asset and lease liability balances are left off the balance sheet. The ASC 842 Glossary defines a right-of-use (ROU) asset as an asset that represents a lessee's right to use an underlying asset for the lease term.

Leaving these balances out can lead to non-compliance with accounting standards. It can also misrepresent a company's financial position and key financial ratios.

⚠️ Risk Alert: A common audit finding is that a company overlooked service contracts with embedded leases. That can significantly understate the liabilities and assets on the balance sheet.

Concrete Risks of Incomplete Lease Population

• Material Misstatement: Failure to recognize all leases under ASC 842 directly affects the balance sheet and income statement. It understates assets and liabilities. This can result in an audit finding or even a restatement.
• ROU Asset Audit Challenges: A proper ROU asset audit relies on complete data. If the company has not found all of the underlying lease agreements, the later valuation and classification of ROU assets and lease liabilities will be flawed. That leads to audit deficiencies.
• Debt Covenant Effects: Many debt agreements include covenants tied to balance sheet metrics. Recording leases that were missed adds lease liabilities and total assets. That lowers liquidity ratios such as the current ratio and quick ratio, and it lowers asset turnover. Whether a covenant is breached depends on how the agreement defines its terms. KPMG's Handbook: Leases (Question 6.1.10) notes that Topic 842 treats operating lease liabilities as operating liabilities rather than debt. So debt-based ratios such as debt-to-equity may not move much.
• Restatement Costs: When missing leases turn up after the financial statements are issued, the company often has to restate. Restatements are costly and slow. They erode investor confidence and take significant management attention.

Calculation Example: Impact of an Unidentified Lease

Scenario: A company fails to identify a 5-year equipment lease. The annual payments are $50,000, and the discount rate is 5%. Payments are annual, in arrears, with the first due one year after commencement.

Key Takeaway: An overlooked lease can materially understate both lease liabilities and ROU assets. The effect on the balance sheet is significant. This can lead directly to material weaknesses and audit qualifications. The article on material weakness management in leases covers this in detail.

Practical Checklist for Lease Identification

Completeness takes a methodical approach to lease identification audit. This checklist gives a framework to find all potential leases in an organization. It is most useful for finding embedded leases in contracts.

Checklist for Lease Population Completeness

1. Define Scope and Centralize Responsibility:
   • Action: Assign a central team or person to own lease accounting and completeness.
   • Why: Keeps the work consistent and makes someone accountable.
2. Conduct a Comprehensive Contract Inventory:
   • Action: Review all contracts across departments in a systematic way (e.g., procurement, IT, real estate, fleet, facilities).
   • Why: Captures explicit leases and potential embedded leases.
3. Review General Ledger Accounts:
   • Action: Look closely at accounts likely to hold lease payments (e.g., rent, equipment rental, service contracts, vehicle expenses).
   • Why: Finds payments that might tie to unrecorded leases.
4. Examine Vendor Master Files and Payment Data:
   • Action: Analyze vendor lists and payment histories. Look for recurring payments to lessors or service providers that might point to a lease.
   • Why: Uncovers contracts that no one flagged as leases at first.
5. Use Fixed Asset Listings:
   • Action: Compare leased assets with owned assets. Investigate any assets in use but not owned.
   • Why: Confirms that every asset under a lease is properly recognized as an ROU asset.
6. Create an Embedded Lease Identification Protocol:
   • Action: Build a checklist or decision tree to evaluate service/supply contracts for embedded leases.
   • Why: Standardizes the complex work of embedded lease discovery.
7. Implement New Contract Review Procedures:
   • Action: Set up a workflow that sends every new contract to the lease accounting team, which reviews it for lease components.
   • Why: Keeps new leases from being missed after transition.
8. Reconcile with Prior Year Information:
   • Action: Compare the current lease population with prior periods. Investigate significant changes or omissions.
   • Why: Keeps continuity and finds leases that may have been missed since the last audit.

✅ Best Practice: Organizations with strong execution hold quarterly lease reviews. They also build 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 make sure lease data is complete for an audit, set clear internal controls to identify all contracts that contain a lease. Review general ledger accounts and vendor payments on a periodic basis. Put in place a robust system to track new and modified contracts. Then build these procedures into your overall ASC 842 audit readiness checklist.

How to Evidence a Complete Lease Population

Accounting teams need to validate that their lease identification process is comprehensive. That is crucial for lease accounting compliance. It means showing auditors that the process is designed well and that it also operates effectively.

According to FASB ASC 842-10-15-3, the test is this. 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 means documenting the whole process, from the first contract identification to the formal recording of the lease. For more validation steps, see the article on lease documentation requirements.

Acceptable Evidence and Documentation

• Process Narratives and Flowcharts: Detailed descriptions of how the team identifies contracts, reviews them and enters them into the lease accounting system. These should include responsibilities and approval levels.
• Sampling Results: Evidence of contracts reviewed for embedded leases. Include the identification checklist or decision tree used and the conclusions reached for each sample.
• Reconciliation Reports: Documentation that reconciles contracts found 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. It shows whether each one contained a lease, and the rationale.
• IT System Controls: Documentation of controls within any lease accounting software or enterprise resource planning (ERP) system. These are the controls that ensure data integrity and completeness.
• Training Records: Proof that the people who review contracts or do lease accounting have had adequate training on ASC 842 lease identification criteria.

💡 Key Takeaway: The quality and availability of documentation matter most. Auditors rely heavily on thorough documentation to judge how well completeness procedures work.

Common Completeness Gaps and How to Close Them

Even with robust systems, companies often make avoidable mistakes in completeness testing. These errors can draw audit scrutiny and potential adjustments.

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

What Thorough Completeness Testing Looks Like

Strong lease completeness testing leads directly to fewer audit findings, a smoother audit and more confidence in financial reporting. It is about more than checking boxes. It's about building 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. Its accounting team works with IT and procurement on a comprehensive approach to lease completeness:

1. Centralized Contract Repository: The company stores all contracts in a single system. Each one is tagged with keywords that point to potential lease components.
2. Automated GL Scans: A quarterly automated scan runs over specific GL accounts (e.g., 'rent expenses – non-real estate,' 'equipment service fees'). It flags unusual or large recurring payments for manual review.
3. Cross-Functional Review: The system automatically routes new procurement contracts over a certain threshold (e.g., $5,000 annually) to the lease accounting team. The team reviews them before final approval. Procurement and legal teams also get training on how to spot lease indicators.
4. Period-End Reconciliation: Before it closes the books each quarter, the lease accounting team reconciles the current lease population in its lease management software. It checks that population against a master list built from GL, fixed assets and newly executed contracts. The team investigates and resolves any discrepancies.
5. Documentation: The team documents with care every review checklist, reconciliation and decision on lease vs. non-lease components. All of it is ready for audit.

This proactive and integrated approach significantly cuts the risk of missed leases. It streamlines the ASC 842 audit. It also gives assurance that the financial statements are materially complete for lease assets and liabilities. This approach also supports lease completeness under ASC 842.

Where to Go From Here on Lease Completeness

A complete lease population takes continuous effort and robust internal controls to achieve and maintain. Focus on systematic processes to identify, evaluate and document every contract that might contain a lease. This proactive approach will stand up to auditor scrutiny. It will also give 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