The Center for Audit Quality is offering some tips to audit committees on how to query senior management on corporate readiness for new lease accounting standards.
With the new lease accounting rules taking effect Jan. 1, 2019, for public companies, the CAQ is looking to assure audit committees understand what the new standard requires and what questions audit committees should be asking to stoke implementation efforts. Adopted by the Financial Accounting Standards Board, the new standard requires all public companies to reflect assets and liabilities associated with leases on the face of the corporate balance sheet and in the income statement.
In the 12-page paper, CAQ warns audit committees about concerns regarding corporate readiness for the new standard, which is codified as Accounting Standards Update Topic 842, or ASC 842. A recent Deloitte poll found only 21 percent of professionals believe their companies are well prepared to comply with the new rules.
The CAQ is prodding audit committees to ask senior management questions around how the company will account for lease changes, and whether the company is on track for a successful implementation. The alert also tells audit committees to consider asking questions about how the company is preparing investors and creditors to understand the impact of the new standard on the company and its reporting.
Audit committees should want to know if there are new processes and controls being developed to address the accuracy of the adoption and the accuracy of ongoing accounting under the new rules. They should also have questions about how the company is developing appropriate disclosures.
In terms of assessing the effect the new standard will have on companies, the CAQ offers a long list of questions for audit committees to consider asking, addressing things like how the impact has been assessed, whether the assessment benefitted from the perspective of a cross-function of the organization, and whether companies considered a wide range of factors as they performed their assessment.
Audit committees might also want to ask about things like debt covenants, income taxes, financial planning and analysis, investor relations, compliance, lease-versus-buy decisions, lease contracting practices, systems, processes, and controls, the CAQ advises.
To properly evaluate the implementation effort, audit committees will need to understand the organization’s implementation project plan, its culture, the resources that have been committed to implementation, the company’s accounting policies and significant accounting judgments, systems issues, controls, and the planned transition method.
Investors want to understand the effect of the new standard, says Cindy Fornelli, executive director of the CAQ, in a statement. “Our tool is designed to help audit committee members, auditors, and company management understand that impact and plan for a timely implementation,” she says. “The new standard is broad and will fundamentally change how companies account for leases.”