The introduction of the Accounting Standards Codification (ASC) 842 by the Financial Accounting Standards Board (FASB) fundamentally changed the landscape of lease accounting. This new standard requires organizations to recognize lease liabilities and right-of-use (ROU) assets on the balance sheet, bringing increased transparency to an organization's leasing activities.
How can businesses streamline this transition and feel comfortable that they will pass the audit process?
Enter iLeasePro, a dedicated lease accounting solution. In this guide, we'll discuss how to pass an ASC 842 Lease Accounting audit and how iLeasePro can be your trusted ally in this journey.
1. Understand the ASC 842 Standard
Before anything else, it's crucial to have an in-depth understanding of the ASC 842 standard:
- Scope & Applicability: ASC 842 applies to lessees and lessors, and encompasses all leases, including real estate, equipment, and more, with lease terms of more than 12 months.
- Recognition & Measurement: Lessees will now have to recognize ROU assets and lease liabilities on their balance sheets. The measurement will depend on the lease classification: operating or finance.
While ASC 842 applies to all leases with terms longer than 12 months, iLeasePro offers a centralized platform to manage and track all your leases, ensuring no lease goes unnoticed. iLeasePro automates the process of recognizing ROU assets and lease liabilities, ensuring accuracy and adherence to the standard's requirements. Learn more from our iLeasePro Lease Accounting Overview.
2. Comprehensive Lease Inventory
A successful audit starts with a comprehensive list of all the organization's leases. Ensure that:
- Every lease, whether embedded in a larger contract or standalone, is documented.
- Lease terms, payment schedules, renewal options, and other pertinent details are accurately captured.
With iLeasePro, you can maintain a detailed digital inventory of all your organization's leases, ensuring that all terms, payment schedules, and other essential details are easily accessible and up to date.
3. Implement a Robust Lease Accounting Solution
Given the complexity of the new standard, many organizations are turning to specialized software solutions:
- These solutions can assist with calculations, producing financial statements, and maintaining an audit trail.
- Make sure your solution is compliant with ASC 842 requirements.
iLeasePro is designed to be in line with ASC 842 requirements, offering advanced calculations, financial statement generation, and a traceable audit trail. iLeasePro is certified SOC 1 Type 1. Take the iLeasePro Product Tour.
4. Adopt a Detailed Transition Approach
Transitioning to the new standard requires careful planning:
- Choose between the full retrospective or modified retrospective approach.
- Prepare opening balances and adjust comparative periods as required.
iLeasePro aids in the transition by offering tools tailored for both the full retrospective or modified retrospective approaches, making it simpler to prepare balances and adjust comparative periods. iLeasePro's Initial Transition Feature and Help Guides make transitioning a seamless exercise.
5. Ensure Proper Lease Classification
Leases must be classified as either operating or finance:
- Understand the five criteria for lease classification under ASC 842.
- Maintain documentation justifying the classification of each lease.
With its in-built Lease Classification Wizard, iLeasePro ensures that leases are correctly classified as either operating or finance, and maintains documentation justifying each lease's classification.
6. Detailed Calculations & Documentation
Ensure that the calculations for ROU assets, lease liabilities, and associated expenses are:
- Consistent with the ASC 842 standard.
- Properly documented, including assumptions made and sources of data.
iLeasePro offers precise calculations in line with ASC 842. It provides clear documentation of assumptions and data sources, streamlining the audit process. Ask us for our iLeasePro ASC 842 Assumptions and Input Documentation!
Under ASC 842, companies must provide qualitative and quantitative disclosures:
- These provide more insight into the amount, timing, and uncertainty of cash flows from leases.
- Ensure that your disclosures are comprehensive and in line with the requirements.
Leveraging iLeasePro, organizations can effortlessly generate both qualitative and quantitative disclosure reports, ensuring they meet the ASC 842's comprehensive requirements.
8. Ongoing Training & Compliance Updates
Staying up to date on the ASC 842 Standard and how iLeasePro supports your compliance:
- Regularly train your finance and accounting teams on the nuances of ASC 842 with easy to use videos and comprehensive help guides
- Stay updated with any amendments or interpretations of the standard by the FASB.
iLeasePro offers continuous updates to stay in line with any ASC 842 amendments. Plus, its user-friendly interface and support materials ensure your team always remains knowledgeable about the platform and the standard.
9. Engage with Experienced Auditors
Engage with auditors who have::
- Experience with ASC 842 audits.
- A deep understanding of your industry and its specific challenges.
By providing a transparent and comprehensive lease accounting solution, iLeasePro makes it easier for auditors to understand your organization's lease portfolio and ensures a smoother audit process. Subscription fees includes unlimited users for you and your team. You can add an auditor as a user with access to your lease data at no additional cost!
10. Continuously Monitor Lease Portfolio
- Regularly review and update your lease portfolio for any new leases, changes to existing leases, or lease terminations.
- Reassess lease classifications if there are modifications.
iLeasePro’s real-time tracking ensures that any new leases, modifications, or terminations are immediately reflected, and lease classifications are reassessed when needed.
11. Maintain a Strong Internal Control Environment
- Establish controls to ensure accurate data collection, calculations, and reporting.
- Regularly test these controls for effectiveness.
iLeasePro establishes robust controls for data accuracy and reporting. Its in-built testing mechanism ensures these controls remain effective over time.
Let iLeasePro Help You in Your Auditing Journey
At iLeasePro, we’ve been helping companies understand and implement ASC 842 since it replaced ASC 840 in December of 2021. We know standard inside out, and we know how to implement software solutions that will help you be in compliance.
We’ve done this for both small and large businesses, and we’ve also helped these companies use ASC 842 as a business tool to operate more efficiently, get better reporting and use their leases as assets. When you call us we can set you up with a lease accounting software free demo so you can see how it all works.
To do this, call us at 888-351-4606, or you can email us at firstname.lastname@example.org We also have plenty of great information about lease accounting software on our website, which is ileasepro.com, and you can chat with a live representative there as well.