Lease Accounting Checklist

Request executed contracts signed during the quarter from legal, procurement, and real-estate teams. Common gotchas: embedded leases inside service agreements (data center colocation, dedicated equipment supply), and short-term renewals that quietly extend past 12 months.

For each contract, document whether it conveys the right to control the use of an identified asset for a period in exchange for consideration. Watch for substantive substitution rights — if the supplier can swap the asset and benefits from doing so, there is no identified asset and no lease.

Allocate consideration between lease components (use of the asset) and non-lease components (CAM, maintenance, supplies) based on standalone prices. If the policy election to combine components is in place per asset class, document the election in the workpaper.

Pull the modifications log from LeaseQuery, Visual Lease, or NetLease. Flag any change in scope, consideration, or term — these drive remeasurement or a new lease determination. Partial terminations are commonly miscoded as full terminations.

Include renewal options only when reasonably certain to be exercised; include termination options only when reasonably certain not to be exercised. Document the economic incentives (leasehold improvements, below-market rate, business disruption) supporting the conclusion.

Apply the ASC 842-10-25-2 tests: transfer of ownership, purchase option reasonably certain, lease term ≥ 75% of economic life, present value ≥ 90% of fair value, specialized-use asset. Any one met → finance lease; otherwise operating.

Use the rate implicit in the lease if readily determinable; otherwise the incremental borrowing rate (IBR) matched to lease term and currency. Private companies may elect the risk-free rate by class. Document the rate source — treasury yield curve date, lender quote, or implicit-rate calc.

Reviewer ties out the term, IBR, and classification conclusions to the contract and the IBR memo. Disagreements get logged as review notes and cleared before measurement begins.

Present-value the fixed lease payments, in-substance fixed payments, and amounts probable under residual-value guarantees. Exclude variable payments tied to usage or sales. Run the calc in LeaseQuery / Visual Lease and export the amortization schedule to the workpaper.

ROU asset = lease liability + prepaid rent + initial direct costs − lease incentives received. Initial direct costs include commissions and payments to existing tenants for early termination; they exclude allocated internal salaries and legal fees for negotiation.

Dr ROU asset / Cr Lease liability for each new lease this period. Tie the entry to the lease subsystem before posting to the GL — out-of-balance roll-forwards are the most common audit finding here.

Triggering events include exercise (or non-exercise) of a renewal/termination option previously excluded, change in the assessment of a purchase option, and resolution of a contingency that fixes previously variable payments. Index/rate changes alone (CPI escalators) do not trigger reassessment under ASC 842.

An expansion that adds a new asset at standalone price = separate lease. Other modifications = remeasurement at the modification date with a new IBR. Partial terminations require proportional reduction of the ROU asset with gain/loss to the income statement.

Recalculate the lease liability using the revised payments and updated IBR. Adjust the ROU asset by the same amount, with any excess reduction taken to P&L. Export the revised amortization schedule and attach to the modification workpaper.

Apply the modification in LeaseQuery / Visual Lease / NetLease with the correct effective date. Confirm the modification flows through to next month's amortization run before closing the workpaper.

Tie out ROU asset, current lease liability, long-term lease liability, lease expense, and accumulated amortization between the lease system and the GL. Investigate any variance over $1,000; document reconciling items in the workpaper.

Generate undiscounted future payments by year for years 1-5 and thereafter, separately for operating and finance leases, with a reconciliation to the lease liability balance. This is the table auditors trace first — every footing and crossfoot needs to tie.

Cover nature of leases, options and residual guarantees, restrictions or covenants, sale-leaseback transactions, and significant judgments (IBR selection, term assessment, classification). Pull last quarter's footnote and update for new leases, modifications, and any policy changes.

Controller reviews the full package — identification log, classification memos, measurement workpapers, modification support, GL tie-out, maturity analysis, footnote draft. Sign-off locks the workpaper in the document management system.