Lease Standard Education Series for Nonprofits – Audit Preparation Recommendations
For many nonprofits, this time of year means year end close and audit preparation. To close out of the lease standard educational series, below are some recommendations to help you prepare to adopt the new lease standard as part your upcoming audit engagement.
When undertaking a large project, like the lease standard, it is important to develop a detailed plan which includes establishing a realistic timeline that works well for both the management team and auditors. Make sure you and the auditors agree on how the new standard will be adopted as part of the current audited financial statements. The adoption approach selected has an impact on the financial statement presentation and the audit preparation involved.
Once the adoption method is decided upon, start by taking inventory of the known leases and then consider the possibility for any embedded leases. Proving completeness is one audit assertion that the auditors need to address when performing their engagement. This can be challenging for auditors to grapple with so any help proving that all leases have been included in the standard’s adoption will ultimately save time and effort for both parties. This can be done by reviewing existing lease contracts. The prior year financial statements can be reviewed for disclosures related to existing leases, both finance (formerly capital) and operating leases. Service contracts and supply arrangements should be reviewed to determine if the right to use an identified asset is embedded in the arrangement. Preparing a memo that goes through the process that was used to identify leases can provided some valuable information for the audit process.
After gathering all lease agreements, the next logical step is determining the lease classifications and identifying the key leases terms – discount rates, initial direct costs, dates, etc. If the organization plans to use any practical expedients, those should be considered at this time as well. Using a lease software, excel spreadsheet, or some other tool to mathematically collect and track this lease information is important. Doing so can efficiently calculate the right of use assets and related lease liabilities that are to be recorded and the related adjusting journal entries needed prospectively.
The electronic documentation, including the various lease agreements, can then be shared with your auditors for their review – although we recommend that this documentation is first reviewed by another member of management or governance to increase the accuracy of the information. This documentation should include memos of understanding and thoroughly document management’s consideration and governance’s approval of any practical expedients adopted, and estimates made. It is important that the discount rate used and how that was determined is included in documentation of lease calculations.
How CLA Can Help
The new lease standard is here. Be proactive to understand its impact on your nonprofit. CLA has the lease resources to help assess the standard’s impacts beyond general accounting and financial reporting. We can help walk you through readiness assessment, software selection and analysis, and implementation.
A turnkey lease accounting option can include:
- Assistance to identify and analyze leases that are subject to the standard
- Delivery of leased asset schedules, journal entries, and comprehensive footnote disclosures
- Updated and revised information at future interim or annual periods based on your needs
Lease Education Series
This concludes our lease educational series, and we hope you found the content helpful. In case you missed or would like to reread any previous blog posts, see the list below for the full series:
Lease Identification and Lease Term
Practical Expedients and Policy Elections
Building Lease Example, No Change in Lease Classification
Building Lease Example, Change in Lease Classification
Financial Statement Presentation and Footnote Examples
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