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Lease accounting internal controls considerations for ASC 842

Insights on key areas of ASC 842 planning and implementation

Adopting ASC 842, the new lease accounting standard from the Financial Accounting Standards Board (FASB), is a complicated and demanding process. What is one area of implementation that, if overlooked, could significantly affect a company’s efforts to establish a sustainable, ongoing ASC 842 compliance process? It’s internal controls.

Key considerations for internal controls

In this new point of view, we share insights on four key areas of ASC 842 planning and implementation that warrant a closer look to make sure internal controls are designed to address the inherent risks in lease accounting, and we offer specific suggestions for designing internal controls.

  • Entity-level controls
    Did you realize that company management and audit committee responsibility for entity-level controls likely extends to overseeing the company’s overall lease implementation? In order to faithfully fulfill that responsibility, the management team and the audit committee will likely want a firm understanding of the implementation road map and will want to feel confident that internal controls are adequate.
  • Technology considerations
    Whether a company is implementing software or intending to execute lease implementation in a spreadsheet solution, internal controls over those solutions are critical to maintaining a sustainable solution. Whichever approach you’ve taken in the past, we offer considerations for controls to address risks.
  • Pre-adoption and Day One planning
    When a company adopts the new lease accounting standard, some controls are unique to the transition period. Inappropriately designed internal controls could have an impact on the company’s timeline and the overall cost of implementation. We provide a list of important considerations to help you design effective internal controls that can prevent and detect financial statement misstatements in your implementation.
  • Ongoing business processes—Day Two and forward
    ASC 842 contains a number of new concepts, such as lease re-assessment. With new judgments and change come new risks. We offer suggestions on how to refine your internal controls to address these new risks, so you can build a compliance process that is repeatable and sustainable.

The roles of the preparer and the reviewer

Sensitivity is growing, both in internal controls environment and among auditors, regarding the distinction between a process and a control. Making an accounting estimate or other judgment is a process. Within that process, internal controls are essential to address the risks that arise from that judgment.

Companies will want to evaluate whether the individuals assigned to perform the processes (preparers) and the internal controls stewards (reviewers) have the requisite skills and knowledge to create effective controls. Which people fill those roles likely depends on the company’s organizational structure and the expertise possessed and required for each process and internal control. The skills and backgrounds of the individuals in these roles can vary throughout the organization.

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Get your internal controls in shape

As one of the biggest accounting changes in recent history, ASC 842 will likely challenge public and private companies alike to have confidence in the financial statements they prepare. Internal controls are a vital part of the equation, and having the right ones in place can be crucial to getting the new lease accounting standard right.

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The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

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