To start designing preventive controls over Lease Accounting under ASC 842, management would first need to identify an LSPM at the “OpEx. vs CapEx” determination process (i.e., whether a vendor invoice should be expensed or capitalized) in the three-way match controls.
An example of the LSPM would be such that;
LSPM 1″A (long-term) leased asset (as defined under ASC 842) could could be improperly expensed (without accounting for corresponding ROU (Right of Use) assets and lease liabilities).”
Then, an example of the control mitigating related risks (of the understatement of the assets and liabilities) would be;
Control 1“Upon a three-way match, or an AP journal entry, the system prevents the AP entry from being made, and alarms the flag being attached to the related contract if it has been indicated and flagged as a lease (under ASC 842).”
Control 1-2” Upon the three-way match of a lease/rent supplier invoice, which is flagged as a lease in the system, Authorized Manager makes a tentative, manual journal entry (of Dr. Expense / Cr. AP) and keeps the flag for their subsequent update per ASC 842 (at monthly closing as part of the Record to Report cycle).”
Then, at the month end, the JE (of Dr. Expense / Cr. AP) should be reversed as;
- (Dr.) ROU Assets xxx (Cr.) Lease Liabilities xxx
- (upon cash payment)
- (Dr.) AP xxx (Cr.) Cash xxx
Note that this Control 1-2 should be exercised using a proper template that lists required control attributes, per ASC 842, such as , among other things (in order to determine the balance of the ROU assets and lease liabilities);
- What is the lease term?
- What are the lease payments?
- What is the discount rate?/How is the rate is determined?
- What is the fair value (of the underlying asset)?
Naturally, prior to the control (and LSPM 1), another LSPM would need to be such that;
LSPM 0“A (long-term) lease/rent contract could fail to get identified as a lease (under ASC 842) when signed/authorized.”
An example control associated with LSPM 0 should look like;
Control 0“Authorized Manager determines whether or not each lease/rent contract entered into is a lease under the definition of ASC 842, and indicates as such, in the contract management system, by flagging .”
Similarly to Control 1, Control 0 should be exercised with a template to go over the items to identify a lease (as described in ASC 842) such as;
- There is a specifically identified asset.
- The supplier does NOT have a substantive substitution right.
- The company/management has the right to obtain substantially all of the economic benefits from use of the asset.
- The management has the right to direct the use of the asset.
Control 0 would properly set up the program, in the system, which lays the ground for Control 1, restricting that only Authorized Manager can post the lease asset/liability/expense journal entries as dictated by ASC 842.