Completeness Assertion – What Does it Mean In Lease Accounting?
The completeness assertion is a critical component of lease accounting under ASC 842, and it is essential for businesses to understand how it impacts their financial reporting. In this blog post, we will discuss the completeness assertion, ASC 842, and how to ensure compliance with both.
Explanation of the Completeness Assertion
The completeness assertion is an auditing concept that ensures all transactions and events that should be recorded have been recorded. In lease accounting, the completeness assertion means that all leases and lease-related transactions have been identified, recorded, and reported accurately in financial statements.
In simple terms, completeness assertion ensures that there are no missing leases or lease-related transactions in the financial statements. This is important because missing leases or transactions can result in inaccuracies and misrepresentations in financial statements, which can lead to compliance issues and potential legal consequences.
Overview of ASC 842
ASC 842 is the new lease accounting standard issued by the Financial Accounting Standards Board (FASB) that replaced ASC 840. The primary objective of ASC 842 is to increase transparency and provide better information about a company’s leasing activities to investors and stakeholders.
Under ASC 842, companies are required to recognize all leases on their balance sheets, including operating leases. Previously, only finance leases were required to be recognized on the balance sheet. ASC 842 also introduced new requirements for lease disclosures.
Completeness Assertion under ASC 842
The completeness assertion is an essential concept in lease accounting under ASC 842. It ensures that all leases, lease-related transactions, and relevant data have been accurately identified, recorded, and reported in the financial statements.
For example, a company must ensure that it has identified all of its leases, including embedded leases. Additionally, companies must ensure that they have recorded all lease-related transactions, including lease modifications, terminations, and renewals.
Completeness assertion also applies to lease-related data, such as lease terms, lease payments, and lease-related expenses. All of this information must be accurately recorded and reported in the financial statements to ensure compliance with ASC 842.
Here are some common examples of how a company can get tripped up on the completeness assertion:
Example 1: A company has several leases that were not recorded in the financial statements. These leases were not identified during the initial lease review process, and as a result, were not recognized on the balance sheet.
Example 2: A company modifies an existing lease, but the modification was not accurately recorded in the financial statements. The company failed to update the lease term, which resulted in inaccurate lease payments being reported in the financial statements.
Real World Examples of Completeness Assertion under ASC 842
To better understand the impact of the completeness assertion in lease accounting under ASC 842, let’s consider a few real-world examples.
Enron, a former energy company, infamously engaged in accounting fraud, including the misrepresentation of lease-related transactions. Enron failed to properly disclose the true nature and financial impact of certain leases, which led to material misstatements in its financial statements. The company was ultimately exposed, leading to bankruptcy and legal consequences for its executives.
Dell, a technology company, faced completeness assertion issues when it failed to properly identify all of its lease-related expenses. The company misclassified certain expenses as non-lease-related, leading to inaccuracies in its financial statements. Dell ultimately restated its financial statements to correct these inaccuracies and ensure compliance with ASC 842.
Both the Enron and Dell cases highlight the importance of ensuring compliance with the completeness assertion in lease accounting. Failure to properly identify, record, and report all leases and lease-related transactions can lead to inaccuracies and misrepresentations in financial statements, which can have significant legal and financial consequences for companies.
Ensuring Completeness Assertion in Lease Accounting under ASC 842
Ensuring completeness assertion in lease accounting under ASC 842 requires a systematic approach to lease management. Here are some key steps to ensure completeness assertion:
- Identify all leases: Companies should review their population of contracts to help identify all leases, including embedded leases. We suggest companies add a lease identification review process to all new contracts to ensure no lease is missed at the contact onset. Just because a contract does not have the word “lease” in it does not mean the contract is not a lease!
- Record all lease-related transactions: Companies must record all lease-related transactions, including modifications, terminations, and renewals. To ensure all transactions have been recorded, we suggest inquiring with department owners who have leases to determine if they have entered into new contracts or have amended existing ones.
- Verify lease-related data: Companies should review all information used to build amortization schedules and journal entries. Critical fields that should be reviewed are: lease terms, payments, initial direct costs, discount rate (or risk free rate if using that practical expedient), are accurately recorded and reported in the financial statements.
- Conduct regular reviews: Companies should conduct regular reviews of their lease portfolio and lease-related data to ensure completeness and accuracy.
- Use lease accounting software: Companies can use lease accounting software to streamline lease management, ensure compliance with ASC 842, and improve completeness assertion.
Process and Procedures
For accountants, preparing for their audit is a heavy lift. Completion assertion ensures that your organization’s financial statements like the income statement, balance sheet items, P&L statement as well as overall company performance are prepared for an analytical review from an audit committee. Specific audit procedures should be taken with regard to the Generally Accepted Accounting Principles with the goal of providing sufficient evidence of your lease compliance processes. When preparing your companies completion assertion under ASC 842, it’s worth asking your accounting team the following questions:
- Have we provided sufficient and appropriate audit evidence of our assumptions under ASC 842?
- Have all our lease documents undergone the a truthful presentation of our liabilities and ROU assets?
- Do our internal controls provide a true representation of our financial matters?
- Do we have the required footnote disclosures on our financial statements?
- Does our financial reporting framework under ASC 842 meet the auditors’ analytical procedures?
Completeness assertion is a critical concept in lease accounting under ASC 842. It ensures that all leases and lease-related transactions are accurately identified, recorded, and reported in the financial statements. Failure to ensure completeness can result in inaccuracies and misrepresentations in financial statements, which can lead to compliance issues and potential legal consequences. Companies can ensure completeness assertion by following a systematic approach to lease management and using lease accounting software to streamline lease management and ensure compliance.