How audit committees can evaluate lease accounting implementation

By Ken Tysiac

Adoption of FASB’s new lease accounting standard has proven to be a tedious process for many organizations.

The standard, which takes effect in 2019 for public companies and one year later for most other entities, has challenged financial statement preparers to find and extract data from lease contracts that sometimes have been stored in many different locations throughout organizations.

Implementation requires effort from multiple functional areas of an organization, and requires new judgments and estimates, assessments of accounting policies, and new disclosures.

Audit committees are responsible for oversight of the implementation effort. The Center for Audit Quality, which is affiliated with the AICPA, has created a new tool to help audit committees exercise these oversight duties.

The tool suggests that audit committee ask:

  • How will accounting for leases change?
  • Is the company on track for successful implementation?
  • How is the company preparing investors and creditors to understand the impact to the company and its financial reporting?
  • Are new processes and controls being developed to address the accuracy of the adoption of the standard and the ongoing accounting it requires?
  • Are the appropriate disclosures being developed?

The tool suggests that audit committees should be aware of key judgments required by the new standard, such as whether the company identified all contracts that contain leases, and how the company will measure the new right-of-use asset and lease liability.

In addition, the tool provides questions that audit committees can ask when evaluating the company’s impact assessment, implementation project plan, and other issues, such as transition method and disclosures.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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