How the ASC 842 leasing standard applies to your not-for-profit

On Jan. 1, 2022 ASC 842 lease standards went into effect for organizations. But is your not-for-profit prepared for a potential audit?

The ASC 842 leasing standard is effective for not-for-profit organizations and private companies with annual reporting periods beginning after Dec. 15, 2021. External auditors will test compliance with the new lease accounting requirements during the annual audit of the reporting period that commences after that date. As a baseline, auditors will review the controls in their client’s leasing system and perform a risk assessment. The risk assessment consists of six main assertions:

1. Completeness
2. Validation/allocation
3. Cut-off
4. Classification/presentation
5. Existence/occurrence
6. Rights/obligations

Following risk assessment, auditors will design procedures at the assertion level to ensure that the financial statements are presented in accordance with generally accepted accounting principles. To prepare for your annual audit, it is imperative to understand what questions an auditor will be considering when performing their initial risk assessment.

Did your organization include the full population of leases when implementing ASC 842?

Completeness will be a major audit area when external auditors test for compliance with ASC 842. Auditors will test the assertion that all leases are properly capitalized on the balance sheet. One of the most significant changes between ASC 842 and ASC 840 is that under the new regulation, lessees should recognize a lease liability and right-of-use assets for both operating and finance leases. Accordingly, the balance sheet will reflect an asset and an offsetting liability for finance and operating leases. Evidence of completeness that management could provide to an external auditor include, but are not limited to, a reconciliation of the rent expense as of the most recent accounting period to the underlying lease agreements and documentation of the procedures performed to ensure that the full list of leases has been evaluated. In the absence of such evidence, auditors will likely spend extra time performing additional procedures such as interviewing personnel and performing a physical examination of assets.

Did your organization accurately value the leases that are presented on the statement of financial position?