Lease Standards Under ASC 842 and Peer Review Implications
Understanding ASC 842
ASC 842 is the Financial Accounting Standards Board (FASB) accounting standard for leases. It requires companies to recognize lease assets and liabilities on their balance sheet for leases with terms longer than 12 months. The standard also requires disclosures about leases in the notes to the financial statements, including information about the nature of the leases, the lease terms, and the cash flows associated with the leases.
The standard is effective for public business entities for fiscal years beginning after December 15, 2019, and for all other entities for fiscal years beginning after December 15, 2020. Early adoption is permitted.
Independence Concerns When Providing Consulting Services
Consulting on the implementation of ASC 842 can impair independence if the auditor is providing consulting services to the same entity that it is auditing. Independence is an important principle in auditing, as it ensures that the auditor's judgement is not influenced by any other interests.
The American Institute of Certified Public Accountants (AICPA) has specific rules and guidance on independence related to consulting services. According to the AICPA, providing consulting services to an audit client, such as assistance with the implementation of ASC 842, could impair independence if the services are "prohibited non-audit services" as defined by the rules.
Prohibited non-audit services include:
- Services that involve providing advice on accounting or financial matters, such as the implementation of new accounting standards
- Services that involve management responsibilities
Safeguarding Independence
If an auditor is providing consulting services to an audit client on the implementation of ASC 842, the auditor must ensure that the services do not impair independence. This could involve:
- Implementing procedures to safeguard the integrity of the audit work
- Taking steps to minimize the risk of conflicts of interest
- Disclosing the nature and scope of the consulting services provided to the audit client in the auditor's report
Peer Review Documentation Requirements
If you do provide these services, you are going to have to document how your independence was not impaired if you are being asked as part of a peer review. This documentation is crucial for demonstrating compliance with professional standards and maintaining the integrity of your firm's audit practice.
Recommended Documentation Practices
When providing ASC 842 implementation services to audit clients, consider maintaining the following documentation:
- Detailed description of the services provided
- Clear documentation of who had decision-making authority
- Evidence that management took responsibility for all significant judgments and decisions
- Records of safeguards implemented to maintain independence
- Written acknowledgment from the client regarding their understanding of their responsibilities
How KVR Can Help
Our team at KVR has extensive experience with both ASC 842 implementation and peer review requirements. We can provide guidance on:
- Properly implementing ASC 842 for your clients
- Establishing appropriate safeguards to maintain independence
- Developing documentation that will satisfy peer review requirements
- Preparing for your next peer review
Whether you need assistance with ASC 842 implementation or are preparing for an upcoming peer review, our team is here to help ensure your firm maintains compliance with professional standards while providing valuable services to your clients.