Guide To Auditing Implementation of ASC 842 Leases

Guide to
auditing the
implementation
of ASC 842,
Leases
Revised July 2018
Contents
Glossary of key terms ...................................................................................................... 1

1 Introduction............................................................................................................... 2
1.1 Overview ............................................................................................................................... 2
1.2 Leases audit roadmap for lessees ........................................................................................... 3
1.3 Summary of effective dates and transition .............................................................................. 4
1.4 Transition practical expedients and other policy elections affecting transition ........................... 5
1.5 Transition accounting considerations ...................................................................................... 7
1.6 Effect of implementation on our audit approach and planning .................................................. 8
2 Understand the entity’s process and identify risks ..................................................... 12
2.1 Understand management’s process for implementing ASC 842 .............................................. 12
2.1.1 Critical assessment of management’s timeline .............................................................. 12
2.2 Understand entity-level controls ........................................................................................... 14
2.2.1 Example entity-level controls for each COSO 2013 Framework principle ........................ 14
2.3 Risk assessment .................................................................................................................. 17
2.3.1 Risks related to the completeness of the population of leases ........................................ 17
2.3.2 Risks related to the data that is used to apply the transition provisions .......................... 17
2.3.2.1 Risks when additional lease contracts are identified during
management’s assessment of completeness................................................ 19
2.3.3 Risks related to applying the ASC 842 transition provisions ........................................... 20
2.3.4 Additional risks arising from the use of IT in the implementation .................................... 21
2.3.4.1 Use of service organizations (added July 2018)........................................... 22
2.3.5 Risks related to management’s disclosures ................................................................... 22
2.3.6 Identify significant risks, including fraud risks ............................................................... 22
3 Design and execute tests of controls and substantive audit procedures....................... 24
3.1 Develop and execute our audit strategy ................................................................................ 24
3.2 Planning materiality and tolerable error considerations.......................................................... 26
3.3 Reminders regarding the timing of our audit procedures over the transition
adjustments and workpaper archiving ................................................................................... 26
3.4 Extent of testing procedures ................................................................................................ 27
3.4.1 Addressing identified risks of implementation ............................................................... 27
3.4.1.1 Assess the completeness of the population of leases .................................... 27
3.4.1.2 Assess the completeness and accuracy of the data that is used
to apply the transition provisions ............................................................... 32
3.4.1.2.1 Address risks when additional lease contracts are identified
during management’s assessment of completeness ............................. 34
3.4.1.3 Apply the ASC 842 accounting framework and determine
transition adjustments and disclosures ....................................................... 35
3.4.1.3.1 Testing the discount rate in implementation (updated July 2018) ......... 39
3.4.1.4 Evaluate management’s disclosures during the transition period
(updated July 2018) ................................................................................. 42
3.4.2 Define the population of lease contracts and the sampling unit ...................................... 42
Guide to auditing the implementation of ASC 842, Leases | i

3.4.3 Determine the sample size for testing of lease contracts (updated July 2018) ................ 45
3.4.3.1 Dual-purpose testing (updated July 2018) .................................................. 47
3.5 Use of IT in the implementation and related data considerations............................................. 48
3.5.1 Addressing risks when management uses a service organization
(added July 2018) ...................................................................................................... 49
3.6 Prospective accounting policies (updated July 2018)............................................................. 50
3.7 Extent of testing if the entity asserts it is not materially affected ............................................ 51
A Group audit considerations ....................................................................................... 52
A1 Overview ............................................................................................................................. 52
A2 Organizational structure of the entity’s lease activities........................................................... 52
A3 Management’s process to implement ASC 842 ...................................................................... 53
A4 Significance of the component.............................................................................................. 53
A5 Not significant components .................................................................................................. 54
A6 Extent of work to be performed at in-scope components ........................................................ 54
A7 Oversight of component teams (added July 2018) ................................................................ 55
B Lessor auditing considerations ................................................................................. 56
B1 Introduction (updated July 2018) ......................................................................................... 56
B1.1 Transition for lessors (updated July 2018) ................................................................... 57
B1.2 Effect of the implementation on our audit approach and planning .................................. 58
B2 Understand management’s process for implementing ASC 842 .............................................. 58
B3 Assess risks, plan and execute our audit................................................................................ 58
B3.1 Assess the completeness of the population of leases ..................................................... 59
B3.2 Address risks when the hindsight practical expedient is elected ..................................... 60
B3.3 Evaluate management’s SAB Topic 11.M disclosures .................................................... 61
B4 Considerations related to prospective accounting policies, processes and controls .................. 62
C Use of the GDS Accounting Change COE in auditing the implementation
of ASC 842 .............................................................................................................. 64
C1 Overview of the COE ............................................................................................................ 64
C2 Integration with the COE ...................................................................................................... 65
D SAB Topic 11.M disclosures...................................................................................... 69
D1 Requirements of SAB Topic 11.M and SEC comment trends ................................................... 69
D2 Audit responsibilities — controls and substantive .................................................................... 69
D3 Responsibilities related to quarterly disclosures..................................................................... 73
D4 Disclosures are incomplete or inadequate ............................................................................. 73
E Frequently asked questions ...................................................................................... 74
E1 FAQs — ICFR considerations .................................................................................................. 74
E2 FAQs — Quarterly review procedures..................................................................................... 75
E3 FAQs — EQR responsibilities (updated July 2018) .................................................................. 76
E4 FAQs — Change in auditor ..................................................................................................... 76
E5 FAQs — Engagement management ........................................................................................ 77
F Example risk and control matrix for lessees ............................................................... 80
Guide to auditing the implementation of ASC 842, Leases | ii

Glossary of key terms
• Commencement date of the lease (commencement date) — The date on which a lessor makes an
underlying asset available for use by a lessee.
• Date of initial application — The first day an entity applies the transition provisions of ASC 842 to its
financial statements (e.g., 1 January 2017 for a calendar year-end public entity or 1 January 2019
if the FASB finalizes the proposed optional transition method and a calendar year-end public entity
elects to apply it).
• Effective date — The date on which the entity adopts ASC 842 (e.g., 1 January 2019 for a calendar
year-end public entity that does not early adopt).
• Master Lease Schedule — For lessees, a schedule that captures all of the entity’s leases and the data
necessary to compute the transition adjustments. The Master Lease Schedule generally will include the
following information for each lease, as applicable: (1) lease classification under ASC 840, (2) whether
the lease has been modified prior to the effective date, (3) remaining term of the lease and any revisions
to the term if the hindsight practical expedient is elected, (4) remaining minimum rental payments,
(5) discount rate, (6) existing assets and liabilities (e.g., prepaid or accrued lease payments, unamortized
initial direct costs, capital lease asset and obligation) and (7) any other information management may
wish to capture.
• Implementation — This is the term used to describe everything management does to prepare for the
adoption of ASC 842, including calculating transition adjustments, preparing SAB Topic 11.M
disclosures and developing accounting policies, processes and controls to perform the prospective
accounting and make the required disclosures.
• Prospective accounting — The accounting for leases that commence, or are remeasured or modified,
on or after the effective date of ASC 842.
• Prospective period — The period that begins on the effective date.
• Transition adjustments — The adjustments to the financial statements for the comparative periods
presented in the year of adoption (e.g., adjustments to restate the financial statements for 2017 and
2018 for a calendar year-end public entity that adopts the standard on 1 January 2019), including
any adjustment to the opening balance of retained earnings to recognize the cumulative effect of
adoption as of the date of initial application and the adjustment to recognize the right-of-use asset
and lease liability. If the FASB finalizes the proposed optional transition method and an entity elects
to apply it, the adjustments would be recorded as of the effective date.
• Transition period — The period from the earliest comparative period presented in the financial
statements for the year of adoption through the quarter of adoption.
Guide to auditing the implementation of ASC 842, Leases | 1

1 Introduction
1.1 Overview
This Guide to auditing the implementation of ASC 842, Leases, is designed to assist teams in auditing an
entity’s implementation of the new leases standard, Accounting Standards Codification (ASC) 842,
Leases. It focuses on auditing an entity’s transition adjustments and disclosures and related internal
control over financial reporting (ICFR), which we need to address if we are conducting an integrated audit
or using a controls reliance strategy. The guide also discusses what we need to do during implementation
to understand the policies, processes and controls that entities develop to account for leases under
ASC 842 in the prospective period.
When planning for our audit of the implementation, teams need to keep in mind the following points,
which are discussed in detail in this guide:
• The biggest change under the new standard is that lessees are required to recognize a right-of-use
(ROU) asset and a lease liability for most operating leases. This change creates risks that clients and
audit teams need to address, including those related to the completeness of an entity’s population of
leases, the completeness and accuracy of the lease data it collects and uses during implementation
and the application of the ASC 842 transition provisions.
• Management needs to evaluate its existing controls over the accounting for leases under ASC 840,
Leases, to determine whether they are sufficiently precise to address the risks over the identification
of a complete population of leases and the completeness and accuracy of the lease data that will be
used to calculate the transition adjustments. Management needs to assess the entity’s existing
controls early in the process so that controls needed in implementation can be designed and
executed timely.
• Although entities won’t recognize the transition adjustments until the quarter of adoption, the majority
of management’s controls and our contemporaneous audit procedures over the implementation need
to occur in the year prior to adoption. We should begin performing our audit procedures (including
ICFR procedures) as early as possible in the transition period.
• Entities will follow different accounting models to calculate the transition adjustments for leases that
existed prior to the effective date and to account for those that commence, or are modified on or after
the effective date. As a result, entities will need to develop two sets of policies, processes and controls.
• Entities will need to change their accounting policies, processes and controls and make new disclosures,
even if applying the standard doesn’t have a significant effect on the financial statements. We need
to begin evaluating these prospective accounting policies, processes and controls that an entity
develops during the transition period.
• Entities and audit teams should not underestimate the time and resources necessary to implement
the new standard. Teams should be mindful that information technology (IT) systems may not be
adequate to support the initial and subsequent accounting for leases and the preparation of disclosures
required by the new standard, and third-party vendor systems may not be fully functional in time for
adoption. As a result, entities may rely on Excel or legacy systems during the implementation and a
portion of the prospective period and may then implement a new IT system. If that’s the case, we will
need to adjust our audit procedures to address the resulting risks.

Use of this guide
This guide focuses on the risks associated with implementation and procedures we need to perform in
audits of lessees, because this is where we expect the most significant accounting changes and where we
expect to focus the majority of our efforts during implementation. The accounting for lessors retains many
aspects of the lessor accounting model under ASC 840. The risks and procedures we need to consider as
we design our audits of lessors’ implementation of the new standard are included in Appendix B, Lessor
auditing considerations.
Most entities are expected to elect the package of practical expedients provided in ASC 842, and this
guide was developed based on this assumption.
While the expedients were intended to make the transition easier for entities, the transition provisions
will require entities to follow different accounting models for leases that existed prior to the effective
date and those that commence, or are modified, after the effective date. The package of practical
expedients and other transition expedients are discussed in section 1.4, Transition practical expedients
and other policy elections affecting transition. Members of the Quality Network are available to assist
teams on audits of entities that choose not to apply the package of practical expedients.
Our companion publication, Guide to auditing leases under ASC 842, which we refer to as our prospective
guide, is designed to help audit teams address audit considerations for contracts that commence, or are
remeasured or modified, after an entity adopts ASC 842.
Auditing an entity’s implementation of the new leases standard requires a detailed understanding of the
accounting guidance. To help readers understand our audit strategy, this guide describes certain accounting
requirements of ASC 842. But reading this guide is not a substitute for reading our Financial reporting
developments (FRD) publication, Lease accounting, Accounting Standards Codification 842, Leases
(ASC 842 FRD) and other EY leases publications, which can be found on the Lease Accounting Discover page.
The nature, timing and extent of our audit procedures will depend on the nature and complexity of the
entity’s lease activities and contracts, and our assessment of the risks of material misstatement. We tailor
our audits to each entity’s facts and circumstances, including the nature of the contracts being evaluated.
1.2 Leases audit roadmap for lessees

Prior to reading this guide, members of teams on audits of lessees need to review the Leases audit
roadmap for lessees. This guide follows the eight steps in the roadmap depicted below:
Auditing the implementation Auditing the prospective period

1
To be completed by June 2018 November 2018 Year end 2018 Quarter of adoption (Q1 2019) Year of adoption (2019)
2. Identify risks 3. Develop 6. Update risk assessment, 7. Update

1. Obtain preliminary 4. Evaluate design 5. Perform control and substantive understanding 8. Perform audit procedures and evaluate
of material
understanding audit strategy and test controls substantive testing testing related of prospective new disclosures (Q1 and YE)
misstatement to implementation SCOT
The roadmap provides the expected timeline for a calendar year-end public company that does not early
adopt and activities for auditing the implementation and first year of adoption. It also directs users to
learning and enablement resources.
The steps in the roadmap should be completed by all teams. Teams on audits of clients that assert they
are not “materially” affected by the adoption of ASC 842 will still need to perform sufficient procedures
to determine whether we concur with management’s assertion (this is discussed further in section 3.7,
Extent of testing if the entity asserts it is not materially affected).

Please keep in mind that the steps of the roadmap align with EY Global Audit Methodology (EY GAM), but
audit teams may not perform the steps in the order listed, and the steps may be iterative in nature. The
extent of documentation necessary in each step will depend on the entity’s facts and circumstances and
the effects of the adoption.
1.3 Summary of effective dates and transition

ASC 842 is effective for public business entities (PBEs) and certain not-for-profit entities and employee
benefit plans for annual periods beginning after 15 December 2018 (i.e., 1 January 2019 for a calendar
year-end entity), and for interim periods therein.1 For all other entities, ASC 842 is effective for annual
periods beginning after 15 December 2019, and interim periods beginning after 15 December 2020.
Early adoption is permitted for all entities.
Lessees and lessors are required to adopt ASC 842 using a modified retrospective approach as
illustrated in the following graphic:
SAB Topic 11.M disclosures Effective
2016 2017 2018 2019 2020 2021
Leases standard issued, Modified

and early adoption retrospective
permitted application Modified
(calendar-year retrospective
Prior periods presented1 public entities2) application
(all other
calendar-year
Prior periods presented1
entities3)
1
If the FASB finalizes the proposed optional transition method, an entity that elects that method would not retrospectively adjust the prior periods
presented. That is, the entity would continue to apply ASC 840 in those periods.
2
Public entities include public business entities and certain not-for-profit entities and employee benefit plans.
3
Assumes two years of financial statements are presented.
Lessees and lessors are prohibited from using a full retrospective transition approach.
Under the current requirements, entities will have to record adjustments to each prior reporting period
presented in the financial statements during the year of adoption (i.e., in the financial statements for 2017
and 2018 for a calendar year-end entity that adopts the standard on 1 January 2019 and presents three
years of financial statements) and any adjustment to retained earnings to capture the cumulative effect of
adoption as of the date of initial application. These transition adjustments for lessees will include the
recognition of a new ROU asset and lease liability starting with the later of the date of initial application
or the commencement date of the lease for all leases (except for leases that qualify as short-term leases
if the entity elects to apply the short-term lease exception discussed in section 1.4, Transition practical
expedients and other policy elections affecting transition).
1
Refer to section 11.1 of our ASC 842 FRD for the definition of a PBE and not-for-profit entity.

The modified retrospective transition method generally results in an entity applying concepts from both
ASC 840 and ASC 842 to certain leases that existed before the effective date. 2 For example, a lessee
that classified a lease as an operating lease under ASC 840 will use its remaining minimum rental payments
as defined under ASC 840 3 and a discount rate determined at the later of the date of initial application or
the lease commencement date to initially measure its lease liability and ROU asset. The lessee would
continue to apply the transition provisions until certain lease modifications or remeasurement events occur
following the effective date. Absent a lease modification or a remeasurement of the lease liability and ROU
asset,4 the pattern of expense recognition will not change as a result of the adoption of ASC 842, unless
certain elections are made in transition. As a result, an entity could be required to continue applying
guidance from ASC 840 to certain existing leases after the effective date of ASC 842.
Proposed optional transition method
The Financial Accounting Standards Board (FASB) has proposed amending the new leases standard to give
entities another option for transition. The proposed optional transition method would allow entities to
continue to apply the guidance in ASC 840, including its disclosure requirements, in the comparative
periods presented in the year that they adopt ASC 842.
Entities that elect this option would still adopt the new leases standard using a modified retrospective
transition method, but they would recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption rather than in the earliest period presented. In this guide, we
note where this proposed Accounting Standards Update could affect our audit considerations; however, we
do not expect the election of the transition option to significantly alter our audit approach or our
expectation of management’s controls.
Disclosures
An entity that is a Securities and Exchange Commission (SEC) registrant is required to comply with the
disclosure requirements of SEC Staff Accounting Bulletin (SAB) Topic 11.M (issued as SAB 74), which
requires the disclosure of the anticipated effects of adopting a new accounting standard in the quarterly and
annual financial statements leading up to the effective date. Refer to section 3.4.1.4, Evaluate
management’s disclosures during the transition period, and Appendix D, SAB Topic 11.M disclosures, for
a discussion of the audit considerations for SAB Topic 11.M disclosures.
1.4 Transition practical expedients and other policy elections affecting transition
The standard provides several transition practical expedients to assist entities with implementation. 5
The package of practical expedients

Lessees and lessors are permitted to make an election to apply a package of practical expedients that
allows them to not reassess:
• Whether any expired or existing contracts are or contain leases
• Lease classification for any expired or existing leases
• The accounting for initial direct costs for any expired or existing leases
2
Refer to section 11.3.5 of our ASC 842 FRD for examples of the application of the modified retrospective approach.
3
Refer to section 11.3.3.5 of our ASC 842 FRD for a discussion of determining minimum rental payments for operating leases
under ASC 840.
4
Refer to sections 4.5 and 4.6 of our ASC 842 FRD for discussions of the remeasurement and modification guidance under ASC 842.
5
Refer to section 11.2 of our ASC 842 FRD for detailed information on the transition provisions and practical expedients.

These three practical expedients must be elected as a package and must be consistently applied to all
leases. An entity cannot choose which of the practical expedients to apply or which leases to apply them
to (i.e., an entity must apply all three of these practical expedients to all leases or apply none of them).
As previously discussed, we expect most entities to elect to apply the package of practical expedients.
Teams should be mindful that implementing the standard could be significantly more complex for entities
that do not elect the package of practical expedients, particularly when lease classification changes for
existing leases. Members of the Quality Network are available to assist teams on audits of entities that
choose not to apply the package of practical expedients.
The hindsight practical expedient

Entities are also permitted to make an election to use hindsight when determining the lease term
(i.e., evaluating a lessee’s option to renew or terminate the lease or to purchase the underlying asset)
and assessing impairment of an entity’s ROU assets (lessees only). If the hindsight practical expedient is
elected, entities would consider all facts and circumstances that have changed, through the effective
date. The hindsight practical expedient may be elected separately or in conjunction with the package of
practical expedients described above. An entity that elects the hindsight practical expedient must apply it
consistently to all leases. Throughout this guide, we discuss how the election of this practical expedient
would affect management’s processes and controls and our audit procedures.
Easements practical expedient

The new leases standard also includes an optional transition practical expedient that permits an entity to
continue applying its current policy for accounting for land easements that existed as of, or expired
before, the effective date of ASC 842. An entity that elects this practical expedient will be required to
apply it to all of its existing or expired land easements that were not previously accounted for under
ASC 840. Entities will still need to evaluate whether land easements entered into or modified on or after
the effective date meet the definition of a lease under ASC 842. This practical expedient is not discussed
further in this guide because we do not expect its use to require most teams to do more work during the
implementation of ASC 842. The Regional Leases Champions are available to assist teams with any
technical accounting questions related to the application of this practical expedient.
Short-term lease policy election

Lessees can make an accounting policy election (by class of underlying asset to which the ROU relates)
to apply accounting similar to ASC 840’s operating lease accounting to leases that meet ASC 842’s
definition of a short-term lease (the short-term lease exception). A short-term lease is defined as a lease
that, at the commencement date, 6 has a lease term of 12 months or less and does not include an option
to purchase the underlying asset that the lessee is reasonably certain to exercise. The short-term lease
election can only be made at the commencement date.7
Lessees that make this election will not recognize an ROU asset and lease liability on the balance sheet for
qualifying leases. Instead, the lessee will recognize lease payments as an expense on a straight-line basis over
the lease term and will recognize variable lease payments that do not depend on an index or rate as expense
in the period in which the achievement of the target that triggers the variable payments becomes probable.
If an entity applies the hindsight practical expedient, the revised lease term determines whether the
entity can apply short-term lease accounting to a lease if the policy election is made for the class of
underlying asset to which the lease relates. If, as a result of applying hindsight, the entity concludes that
the lease term is more than 12 months, the lessee would not apply short-term lease accounting.
6
Refer to section 2.2 of our ASC 842 FRD for guidance on determining the commencement date.
7
Refer to section 4.1.1 of our ASC 842 FRD for an expanded discussion on determining the class of underlying asset, identifying a
short-term lease and the requirements to make the short-term lease policy election.

This guide does not address additional audit considerations for short-term leases during our audit of the
implementation because the treatment is similar to existing accounting under ASC 840. However, audit
teams for entities that apply this policy election need to perform appropriate testing of management’s
determination of the lease term to support the entity’s use of the short-term lease exception. Teams also
need to understand management’s plan for gathering the necessary data for short-term leases in order
to meet the disclosure requirements under ASC 842.
1.5 Transition accounting considerations

This summary of the accounting considerations when an entity elects the package of practical expedients
is designed to help teams understand the audit implications related to transition for existing operating
and capital leases. Reading this summary is not a substitute for reading section 11 of our ASC 842 FRD.
Initial recognition of leases previously classified as operating leases under ASC 840 that remain
operating leases under ASC 842
Existing operating leases will continue to be classified as operating leases at adoption (i.e., lease
classification is not reassessed in transition when the entity elects the package of transition practical
expedients). However, entities will be required to initially recognize a lease liability and an ROU asset
at the later of the date of initial application or the commencement date of the lease.
The components of the initial measurement of the lease liability include:
• Discount rate8
• Remaining minimum rental payments as determined under ASC 840 9
• Amounts it is probable a lessee will owe under a residual value guarantee
The lessee records an ROU asset measured at an amount equal to the lease liability, adjusted for the
following, as applicable:
• Prepaid or accrued lease payments
• Remaining balance of any lease incentives received
• Unamortized initial direct costs
• Carrying amount of an exit or disposal cost (ASC 420) liability
During periods prior to and following the effective date, subsequent measurement of the ROU asset and
the lease liability for leases that existed before the effective date will continue to follow the transition
provisions of ASC 842. Before the effective date, the lessee will apply the guidance in ASC 840 to assess
whether a modification has occurred and to account for the lease modification. Beginning on the
effective date, the lessee applies the guidance in ASC 842 to account for lease modifications and the
remeasurement of lease liabilities.
The lessee recognizes expense (through the amortization of the ROU asset and lease liability) consistent
with its existing recognition pattern under ASC 840 for the life of the lease unless certain events occur
that require modification or remeasurement under ASC 842 on or after the effective date.
8
Refer to a detailed discussion of how the discount rate is determined in section 11.3.3.4 of our ASC 842 FRD.
9
under ASC 840.

ROU assets are required to be evaluated for impairment in accordance with the guidance in ASC 360,
Property, Plant, and Equipment. However, the FASB staff believes that prior to the effective date, a
lessee’s impairment analysis would consider the ROU asset as its own unit of account rather than as part
of an ASC 360 asset group. As a result, we expect it to be rare that an ROU asset would be impaired prior
to the effective date. In contrast, the FASB staff confirmed that, after the effective date, an ROU asset
would be evaluated for impairment as part of an asset group, following the principles of ASC 360. 10
If the entity elects to apply the hindsight practical expedient, it should consider all facts and
circumstances that have changed through the effective date in determining the lease term. If applying
the hindsight practical expedient results in the conclusion that the lease term should change, the
calculation of the lease liability and the ROU asset is adjusted accordingly. The entity will also need to
reassess the depreciable life of any leasehold improvements associated with the lease.
Initial recognition of leases previously classified as capital leases under ASC 840 that are classified as
finance leases under ASC 842
Existing leases classified as capital leases will be classified as finance leases upon adoption of ASC 842
(i.e., lease classification is not reassessed in transition when the entity elects the package of transition
practical expedients). At the later of the date of initial application or the commencement date of the
lease, entities will recognize an ROU asset as the sum of the carrying amount of the capital lease asset
and any unamortized initial direct costs under ASC 840. Entities will recognize a lease liability at the
carrying amount of the capital lease obligation that they recognized under ASC 840 as of the same date.
Subsequent measurement of the ROU asset and the lease liability will be in accordance with ASC 840 for
periods before the effective date and in periods on or after the effective date until the lease is modified or the
lease liability is remeasured. The lessee recognizes expense consistent with its existing recognition pattern
under ASC 840 for the life of the lease unless certain events occur that require modification or remeasurement
under ASC 842 on or after the effective date. This treatment is similar to that of operating leases.
If the entity elects to apply the hindsight practical expedient, management considers all facts and
circumstances that have changed through the effective date, in determining the lease term. We believe
that if applying the hindsight practical expedient results in a conclusion that the lease term should
change, the entity adjusts the initial recognition of the carrying amount of the ROU asset and lease
liability to reflect the amounts that would have been recorded for the capital lease asset and obligation
under ASC 840 if the revised lease term had always been used. To determine the capital lease obligation
that would have been recorded, the entity adjusts its discount rate to reflect the revised lease term. This
adjustment will have an offset to the opening balance of retained earnings. The entity will also need to
reassess the depreciable life of any leasehold improvements associated with the lease.
1.6 Effect of implementation on our audit approach and planning

While management may not finalize the transition adjustments until the quarter of adoption, it needs to
begin its implementation processes and controls early in the transition period. This includes determining
how to apply the subsequent measurement requirements to existing lease contracts and report on new
or modified leases after the effective date.
To make sure we conduct an effective and timely audit of the effects of adopting ASC 842, we should
begin performing our audit procedures (including ICFR procedures) during the transition period. We need
to obtain contemporaneous evidence of the precision of the implementation controls. We also need to
substantively test management’s determination of the transition adjustments and begin to evaluate
prospective accounting and disclosure policies, processes and controls during the transition period.
10
Refer to section 11.2.4 of our ASC 842 FRD, Impairment of right-of-use assets prior to the effective date, for further discussion
of the impairment considerations in transition.

When designing our audit of the implementation, we may determine that we need to change our
assessments of significant accounts or significant classes of transactions (SCOTs) or our combined risk
assessments (CRAs) for leases. We also may need to change these assessments for the prospective period.
Significant accounts
For entities that have operating leases under ASC 840, the audit team will need to identify significant
accounts for material ROU assets and lease liabilities that are required to be recognized under ASC 842
and related income statement accounts. If an entity previously had capital lease assets and liabilities, we
may have already identified a significant account related to the capital lease asset and obligation and related
income statement accounts but should consider any changes that might occur once ASC 842 is adopted.
New or modified SCOTs
Implementation SCOT
In many cases, audit teams may identify a significant class of transactions (SCOT) related to the
implementation of ASC 842 for existing leases. This SCOT will cover the processes and controls an entity
employs to address the completeness of its population of leases, the completeness and accuracy of lease
data used in calculating the transition adjustments, the calculation of the transition adjustments, the
design and establishment of new accounting policies and procedures to address the accounting and
disclosure requirements under ASC 842 for the prospective period and disclosures under SAB Topic 11.M.
If management asserts that the effect of adoption is not material, some teams may find that the controls
related to adoption of the new standard are adequately documented in the entity-level control process.
However, during implementation, management will still need to design new accounting policies,
processes and controls to address the requirements for prospective accounting and disclosures under
ASC 842 (refer to section 3.6, Prospective accounting policies, for additional discussion).
In group audits, we should consider whether implementation controls need to be identified at components,
especially when multiple SCOTs related to leases exist due to different locations using different processes
and/or systems and having different control owners. For example, the implementation processes and
controls for real estate leases may be handled by personnel at one location that is staffed with individuals
who specialize in negotiating such contracts, but all of the entity’s other leases (e.g., leases of computer
equipment or office furniture) may be handled centrally in its corporate offices. The underlying contract
initiation, accounting and monitoring controls are likely different in this structure for real estate leases and
all other leases, which may result in a different assessment of implementation risks. Thus the Primary Team
may determine that it is most efficient for a component team to perform testing of the implementation for
real estate leases. Refer to Appendix A, Group audit considerations.
Prospective SCOT
We expect an entity’s processes and controls for the prospective period to differ from those the entity
uses in implementation. Therefore, as part of our audit of the implementation, we need to understand
management’s prospective SCOT so that we are prepared to perform a quarterly review in the quarter of
adoption and assess significant changes in ICFR. This SCOT will cover the processes and controls related
to the accounting for leases that existed on the effective date and the processes and controls for leases
that commence or are modified after the effective date, which will require different sub-processes.
For the prospective accounting under ASC 842, management’s process and controls need to address the
risks of material misstatement when an entity (1) identifies a contract and determines whether it is or
contains a lease, (2) identifies and separates lease and non-lease components and allocates contract
consideration, (3) determines the lease term, including the commencement date of the lease, (4) determines
lease classification, (5) initially records and subsequently measures the lease, (6) evaluates lease
modifications and (7) determines the appropriate presentation and disclosures required for the leases.
Refer to our prospective guide for further discussion of the risks and controls that audit teams should
consider and evaluate after the adoption of ASC 842.

Combined risk assessment for the implementation
This section discusses some of the more common situations we expect teams to encounter in our audit of
the implementation and how they may affect our combined risk assessment (CRA).
While determining the completeness of the population of leases is not a new issue for entities, it will take
on greater importance for operating leases because ROU assets and lease liabilities will be recorded on
the balance sheet for the first time. As part of our evaluation of the CRA for lease-related accounts
during implementation, we evaluate the facts and circumstances for the entity that increase the difficulty
of identifying a complete population of leases and whether these lead to a higher inherent risk during the
implementation of ASC 842. For example, we need to consider whether the inherent risk is higher in
audits of entities with decentralized procurement, administration and accounting functions, or different
processes for different types of leased assets (e.g., equipment versus real estate). The risk related to
completeness of the lease population and audit procedures that address the risk are discussed further in
sections 2.3.1, Risks related to the completeness of the population of leases, and 3.4.1.1, Assess the
completeness of the population of leases.
Entities and audit teams need to consider the risk that systems may not be fully functional in time for
adoption. This could result in additional complexities that may result in a higher inherent risk assessment.
For example, entities may need to calculate the transition adjustments using Excel while they are
implementing a new IT system. This may require the entity to design and implement multiple sets of
controls to support the IT system and/or end user computing tools. The effect of IT on the implementation
is discussed further in sections 2.3.4, Additional risks arising from the use of IT in the implementation,
and 3.5, Use of IT in the implementation and related data considerations.
The areas of judgment that could affect the initial valuation of the ROU asset and lease liability include
the discount rate and election of the hindsight practical expedient. The risk of using incorrect discount
rates is greater (1) for leases with significant remaining minimum rental payments and/or (2) when the
entity does not have observable debt transactions. Our assessment of management’s ability to appropriately
determine the inputs to estimate the discount rate may lead us to assess the inherent risk related to
valuation as higher during implementation.
Similarly, the inherent risk related to the valuation assertion may be higher for audits of entities that elect
the hindsight practical expedient, particularly if there are a significant number of contracts to be evaluated
during transition. Entities will need to document adequate support for changes or lack of changes to
estimated lease terms, based on hindsight, or their assessment of the likelihood that they will exercise
options to extend the lease term or terminate the lease. The effect of the hindsight practical expedient on
the accounting for leases during the transition to ASC 842 is discussed further in sections 2.3.3, Risks
related to applying the ASC 842 transition provisions, and 3.4.1.3, Apply the ASC 842 accounting
framework and determine transition adjustments and disclosures.
Although ROU assets are evaluated for impairment following the principles of ASC 360, we expect the
risk of material misstatement relating to this estimate to be low for periods prior to the effective date.
This is because the ROU asset is evaluated as its own unit of account rather than as part of an ASC 360
asset group in transition. As a result, lessees should not reassess the measurement and allocation of
impairment losses recognized in the asset group to which the new ROU asset relates prior to the effective
date when an ROU asset is recognized upon adoption of ASC 842. 11
that do not elect the package of practical expedients, particularly when lease classification changes for
existing leases. An entity that does not elect to apply the package of practical expedients applies, as of
11
Refer to section 11.2.4 of our ASC 842 FRD, Impairment of right-of-use assets prior to the effective date, for further discussion
of impairment considerations in transition.

the lease commencement date (or most recent modification that does not result in a separate new lease),
ASC 842 to determine the lease classification and then follows the transition provisions of ASC 842.
Teams on audits of clients that do not elect the package of practical expedients need to consider whether
this represents a higher inherent risk given the additional effort required in implementation.
The following table lists inherent risk factors that teams should consider when auditing the
implementation of ASC 842. Our assessment of whether these factors represent a higher inherent risk is
a matter of professional judgment and should be clearly documented.
Inherent risk factors — Implementation of ASC 842

Entity-level factors: Account-specific factors:
• Time pressure on management to complete • Whether management elects to use the package
the implementation of practical expedients during transition
• The sufficiency and competency of resources • Whether management elects to use the
to complete the implementation in a timely hindsight practical expedient during transition
manner • Whether management elects the optional
• Changes in management during the transition method, assuming the FASB
implementation finalizes the proposal
• Whether a significant event or transaction • Risks of material misstatement due to fraud
(e.g., tax reform, a business combination) is • Audit adjustments related to lease accounting
planned during the transition period or year or disclosures in recent periods
of adoption or we are auditing ICFR for the
• Whether the entity has restated its financial
first time in either year
statements for leases within the last three
• Complexity of the organization years
(e.g., multinational operations) and/or
• Size and composition (e.g., materiality,
decentralization of leasing or procurement
complexity, use of nonstandard contracts) of
operations
existing leases
• Whether leasing is a core operation for the
• The level of judgment required (e.g., lease
entity
term, renewals, discount rate) to account for
• The entity’s experience in implementing new and make disclosures about leases
accounting standards (e.g., ASC 606,
• Implementation of new IT systems for
Revenue from Contracts with Customers)
lease accounting
• How much management and/or the audit
• Leases tracked using Excel before and/or
committee is focusing on the implementation
during implementation
• Lease accounting system separated from
lease administration system
• How well the entity tracks information about
operating leases
• Volume of lease contracts and other
contracts (e.g., service contracts) that need
to be evaluated for embedded leases
Teams on audits of public entities should also consider referring to the factors identified in the Leases
Readiness Survey that resulted in the entity’s implementation complexity being designated “higher,”
“normal” or “less.”

2 Understand the entity’s process and
identify risks
Auditing the implementation

1
To be completed by June 2018
2. Identify risks
1. Obtain of material
understanding misstatement
2.1 Understand management’s process for implementing ASC 842

We obtain and document our understanding of management’s process for implementing ASC 842,
including the following elements:
• Management’s overall project plan, including the timeline and governance structure (see sections 2.1.1,
Critical assessment of management’s timeline, and 2.2, Understand entity-level controls)
• Management’s plan for identifying a complete population of leases (see section 2.3.1, Risks related
to the completeness of the population of leases)
• Management’s plan for gathering the data needed to apply the new standard (see section 2.3.2,
Risks related to the data that is used to apply the transition provisions)
• Management’s plan on whether to apply the transition practical expedients (see section 1.4,
Transition practical expedients and other policy elections affecting transition)
• Management’s plan for applying the ASC 842 accounting framework to its existing lease contracts to
calculate the transition adjustments and make the required disclosures (see sections 2.3.3, Risks related
to applying the ASC 842 transition provisions, and 2.3.5, Risks related to management’s disclosures)
2.1.1 Critical assessment of management’s timeline

We should critically assess management’s overall project plan and timeline and consider whether the
entity has sufficient and competent resources to complete the implementation.
In its Staff Practice Alert No. 15, Matters related to auditing revenue from contracts with customers, the
Public Company Accounting Oversight Board (PCAOB) staff addressed the effect on the audit of a company
being late in implementing the new revenue recognition standard. Although the alert addresses the
adoption of ASC 606, teams need to be mindful of the following excerpt, which is also relevant to the
adoption of ASC 842:
“Circumstances where a company is late in implementing the new revenue standard might create
incentives and pressures on the auditor that could inhibit the exercise of professional skepticism and
allow unconscious bias to prevail. Incentives and pressures may arise, for example, to avoid
significant conflicts with management or provide an unqualified opinion prior to obtaining sufficient
appropriate audit evidence. In addition, the implementation of the new revenue standard could
heighten scheduling and workload demands, putting pressure on partners and other engagement
team members to complete their assignments too quickly. This might lead auditors to seek audit

evidence that is easy to obtain but may not be sufficient and appropriate, to obtain less evidence
than is necessary, or to give undue weight to confirming evidence without adequately considering
contrary evidence.”
As we assess management’s timeline, we need to be mindful that in addition to implementing policies,

processes and controls to apply the transition provisions and calculate the transition adjustments,
management will also need to separately develop policies, processes and controls to be ready to account
for new and modified contracts and make required disclosures on or after the effective date. Management’s
timeline needs to allow adequate time for the preparation and review of these policies, including the audit
team’s evaluation.
As the complexity of the implementation increases, we expect management’s timeline to begin earlier in
the transition period and the resources identified to have sufficient competence to handle such matters.
If management has not budgeted sufficient time or allocated the right resources to the implementation,
we need to critically assess whether the entity is at risk of not meeting its timeline. In determining the right
resources, management may need to involve personnel from other areas of the entity (e.g., procurement,
legal) to make sure it identifies a complete population of leases and understands the key contract terms
and conditions related to leases. We should also evaluate whether management’s timeline is reasonable
based the entity’s experience in implementing ASC 606.
As shown in the table in section 1.6, Effect of implementation on our audit approach and planning, there
are a number of factors that could affect the complexity of implementing the new standard, including
entity-specific factors (e.g., complexity of the organization, changes in management during the
implementation) as well as complexities specific to leases and applying the ASC 842 accounting
framework (e.g., volume of contracts, complex leasing transactions, election of the hindsight expedient).
In addition, many entities will need to implement new IT systems (or upgrade existing ones) to support
accounting for leases under the new standard and/or track their portfolio of leases. Clients that implement
new IT systems or upgrade their existing systems will need to factor in sufficient time into their project
plan to perform testing to make sure their systems comply with the requirements of ASC 842. They will
also need to make sure they have appropriate IT change management controls. There are a variety of
possible challenges in this area, including the fact that although many third-party vendors are designing
ASC 842 compliant systems, their releases continue to be delayed. We expect it to be difficult for entities
with a sizable portfolio of leases to maintain spreadsheets to track the data, make the necessary
computations, and compile the data needed for disclosures without a significant time investment. Thus,
performing manual calculations (e.g., using an Excel spreadsheet to perform complex calculations) may
indicate a higher risk of error.
As part of understanding and assessing management’s timeline, audit teams can consider the leases
benchmark timeline that can be found on the AC supplemental topics page in EY Atlas. This benchmark
timeline represents our baseline expectations of when key activities should be completed for an entity
to be on track to complete its implementation on a timely basis. The timeline was developed based on our
experience assisting entities with the implementation of the new leases standard as well as insights
gained from entities implementing the new revenue standard. Although the benchmark timeline identifies
specific phases of implementation in a linear manner, the implementation activities are typically iterative
and could take place more than once.
Teams can share certain enablers from the Leases Diagnostic Framework with management to assist in
an entity’s implementation. The example diagnostic timeline highlights activities management may perform
as it assesses the potential effects of the new standard on the organization.

As a reminder, teams auditing public entities are required to discuss their views on management’s
implementation status with audit committees during each quarterly meeting. To prepare for these discussions,
teams will need to have a robust understanding of management’s implementation plan and timeline.
2.2 Understand entity-level controls

We obtain an understanding of entity-level controls relating to the entity’s adoption of ASC 842 to help
us identify and assess risks of material misstatement due to fraud or error and determine the appropriate
audit strategy. In general, we expect management’s plan to include the following elements:
• Control environment — The tone at the top regarding the entity’s implementation of the new standard
is important and will influence the focus and attention placed on accounting changes by the
organization. The entity should develop a plan to train all affected business functions, including
accounting, finance, procurement, legal and tax.
• Risk assessment — Management should perform a risk assessment to identify the new financial reporting
risks, including fraud and significant risks, related to the implementation and prospective accounting.
• Control activities — Management should assess whether transaction-level controls over lease
accounting or IT general controls (ITGCs) over any new or revised IT systems have been designed to
properly mitigate the risks to an appropriate level.
• Information and communication — Management should evaluate whether modifications are needed to
internal and external reporting systems to reflect the new accounting while maintaining the quality
and integrity of the information. Management should also develop a process to communicate roles
and responsibilities related to new controls to be performed by members of the organization.
• Monitoring — Management should develop a plan to monitor new or modified controls arising from
the implementation of the standard and the prospective accounting under the new standard (e.g., by
performing ongoing evaluations to ascertain whether controls are present and functioning).
We need to obtain an understanding of entity-level controls during the transition period (i.e., as part of
our 2018 audit for audits of PBEs that do not early adopt) as well as in the year of adoption.
Certain entity-level controls relating to the implementation of ASC 842 could be similar to those related
to the adoption of ASC 606 because the objectives of the controls will be the same. For example,
management needs to properly train its accounting staff when a new accounting standard is released.
The structure of the training program used to train staff on ASC 842 could be similar to the program
used for ASC 606.
We will need to obtain sufficient appropriate audit evidence to support that the entity-level controls
related to ASC 842 are operating effectively by performing procedures beyond inquiry of the entity’s
personnel. The audit evidence we obtain may include the entity’s project plan and timeline, documentation
outlining the entity’s governance structure for implementing ASC 842 and presentations summarizing
the entity’s plan.
2.2.1 Example entity-level controls for each COSO 2013 Framework principle
The table below lists the 2013 Committee of Sponsoring Organizations of the Treadway Commission
(COSO) Internal Control — Integrated Framework (COSO 2013 Framework) financial reporting principles
and provides example entity-level controls that address each principle.

Management of an entity that uses the COSO 2013 Framework is required to design and execute
controls to address all of its principles. However, we do not expect that management will need to develop
new or additional entity-level controls during the implementation of ASC 842 to address each principle;
existing entity-level controls may be adequate to address certain principles related to the implementation.
COSO 2013 Framework principles Example entity-level controls addressing principles

Control environment
The organization demonstrates a commitment to The entity has established an appropriate governance
integrity and ethical values. (COSO Principle #1) structure for the implementation of a new accounting
The board of directors demonstrates standard and given the key decision makers, including
independence from management and exercises those in IT, tax and operations, if applicable, the
oversight of the development and performance necessary authority. The audit committee effectively
of internal control. (COSO Principle #2) oversees the implementation of changes to internal
control relating to each new accounting standard.
Management establishes, with board oversight,
structures, reporting lines and appropriate
authorities and responsibilities in the pursuit of
objectives. (COSO Principle #3)
The organization demonstrates a commitment A training program for affected departments, both
to attract, develop and retain competent accounting and non-accounting, has been put in place
individuals in alignment with objectives. (COSO and is managed by a qualified project leader. Periodic
Principle #4) evaluation of staffing needs (for both transition and
ongoing resources) is performed by the project
leader. With respect to transition activities, work is
prepared and reviewed by someone with knowledge
of the transition requirements of ASC 842.
The organization holds individuals accountable Performance management processes for individuals
for their internal control responsibilities in the responsible for executing new or revised controls
pursuit of objectives. (COSO Principle #5) are in place. Management is involved in the
performance of control activities in a timely manner.
Risk assessment
The organization specifies objectives with The risk assessments related to the new leases
sufficient clarity to enable the identification standard are evaluated and updated as part of the
and assessment of risks relating to objectives. entity’s implementation plan.
(COSO Principle #6)
The organization identifies risks to the
achievement of its objectives across the entity
and analyzes risks as a basis for determining how
the risks should be managed. (COSO Principle #7)
The organization considers the potential for The entity’s fraud risk assessment considers any
fraud in assessing risks to the achievement of new fraud risk factors related to the implementation
objectives. (COSO Principle #8) of the new leases standard.
The organization identifies and assesses The entity identifies new controls or changes to
changes that could significantly impact the existing controls that address new financial
system of internal control. (COSO Principle #9) reporting risks arising from the implementation of
the new leases standard.

COSO 2013 Framework principles Example entity-level controls addressing principles
Control activities
The organization selects and develops control The design of new control activities is evaluated to
activities that contribute to the mitigation of make sure the activities achieve the objective set out
risks to the achievement of objectives to by the project team and effectively mitigate risks in
acceptable levels. (COSO Principle #10) the transition and prospective periods to an
acceptable level.
The organization selects and develops general IT general controls for new systems or change
control activities over technology to support the management for revisions to existing systems are
achievement of objectives. (COSO Principle #11) identified and tested.
The organization deploys control activities Management establishes policies and procedures to
through policies that establish what is expected mitigate the risks of material misstatement related
and procedures that put policies into action. to the implementation and prospective accounting.
(COSO Principle #12) The operating effectiveness of new control activities
is evaluated to make sure these activities follow the
policy that establishes the expectations and the
procedures put in place for that control.
Information and communication
The organization obtains or generates and uses Management retains sufficient appropriate audit
relevant, quality information to support the evidence about the design and operating
functioning of internal controls. effectiveness of controls over the relevance and
(COSO Principle #13) reliability of information and data.
The organization internally communicates Management communicates modifications to
information, including objectives and objectives or control responsibilities related to new
responsibilities for internal control, necessary accounting standards to key internal stakeholders,
to support the functioning of internal control. including those in different geographic locations or in
(COSO Principle #14) non-accounting functions such as IT, procurement,
treasury, tax, internal audit and legal.
The organization communicates with external The entity communicates relevant and timely
parties regarding matters affecting the functioning information regarding the new accounting standards
of internal control. (COSO Principle #15) to external parties, including shareholders, partners
and regulators.
Monitoring
The organization selects, develops and Management monitors new controls by developing a
performs ongoing and/or separate evaluations testing plan to be included in its periodic evaluations.
to ascertain whether the components of
internal control are present and functioning.
(COSO Principle #16)
The organization evaluates and communicates Management communicates any deficiencies in the
internal control deficiencies in a timely manner controls over the implementation and takes timely
to those parties responsible for taking corrective action to address deficiencies identified,
corrective action, including senior if any.
management and the board of directors, as
appropriate. (COSO Principle #17)

2.3 Risk assessment
2.3.1 Risks related to the completeness of the population of leases
Identifying the complete population of contracts that are or contain leases is a critical first step for
management. This includes making sure that entities identify all lease modifications and consider the terms in
the latest contracts.
A complete population of leases will need to be identified as of each reporting date, beginning with the date
of initial application. If the FASB finalizes the proposed optional transition method and an entity elects to
use that approach, management’s assessment of completeness will be performed as of the effective date.
However, we expect that management’s controls and our substantive audit procedures will be similar and
that management will need to perform procedures before the effective date to address the risk that
management may not have identified a complete population of leases, regardless of whether the entity
elects the proposed optional transition method.
Management needs to reconsider whether its existing controls are sufficiently precise to identify all
leases under ASC 840. This is especially true for operating leases because the risk of understatement of
the ROU asset and lease liability did not exist prior to the adoption of ASC 842. In addition, the election
of the package of practical expedients does not grandfather incorrect conclusions under ASC 840.
In some instances, an entity may not have robust processes in place to distinguish between leases and
service contracts because the accounting treatment for operating leases under ASC 840 is similar to the
accounting for service contracts. Based on the entity’s risk assessment, it may need to design new controls
to determine whether service contracts are leases or contain leases under ASC 840. Entities need to
evaluate all contracts that require the use of an asset to perform a service to determine whether the
contract contains both a lease element (the identified asset) and a non-lease element (the service).
Examples of arrangements that may contain both a lease and a non-lease element include multiple-element
service arrangements (e.g., IT, telecom) and power purchase arrangements.
Refer to section 2.3.2.1, Risks when additional lease contracts are identified during management’s
assessment of completeness, for a discussion of additional risks when management identifies new lease
contracts during implementation.
The following are example what can go wrongs (WCGWs) related to the completeness of the population of
leases for entities that elect the package of practical expedients.
Example WCGWs — completeness of the population of leases

• The entity has not identified all arrangements that are or contain a lease under ASC 840. (C)
• The entity has not identified all lease modifications in accordance with ASC 840. (C)
2.3.2 Risks related to the data that is used to apply the transition provisions
Before computing the transition adjustments, management needs to determine that the data used to
calculate such adjustments is complete and accurate.

For entities that elect the package of practical expedients, some of the key inputs used to determine the
transition adjustments are based on conclusions previously made in accordance with ASC 840. For example,
for leases that were classified as operating leases under ASC 840 and are classified as operating leases
under ASC 842, the following are key inputs 12:
• The remaining minimum rental payments (amounts and timing) as defined in ASC 840 13
• The remaining lease term
• The amounts it is probable the lessee will owe under a residual value guarantee
• Cumulative prepaid or accrued lease payments
• Unamortized lease incentives
• Carrying amount of an exit or disposal cost liability
For leases that were classified as capital leases under ASC 840 and are classified as finance leases under
ASC 842, the capital lease obligation under ASC 840 is recognized as the lease liability. To determine the
ROU asset, the unamortized initial direct costs under ASC 840 are added to the carrying amount of the
lease asset under ASC 840 (i.e., the initial direct costs are reclassified to the ROU asset).14
Other inputs that are important for applying the transition provisions for entities that elect the package
of practical expedients include the following:
• The discount rate for the lease (for operating leases)
• The lease term including reassessment for entities that elect the hindsight practical expedient
The risks associated with making these judgments under ASC 842 are addressed in section 2.3.3, Risks
related to applying the ASC 842 transition provisions.
In addition to risks related to the use of incomplete or inaccurate data, entities also need to consider risks
related to the implementation of new IT systems that store or process lease data. Refer to section 2.3.4,
Additional risks arising from the use of IT in the implementation, for a discussion of risks when management
chooses to use an IT system in the implementation of ASC 842.
Management’s assessment of its systems and controls over lease data

Management needs to assess whether there are effective controls that it can rely on to address the risks of
using incomplete or inaccurate lease data in the implementation of ASC 842. If the entity’s existing
controls over the completeness and accuracy of the lease data are effective, management may not need to
implement new controls. In this case, the risks primarily relate to any transfer of lease data. For example, if
management creates a new Excel spreadsheet to calculate the transition adjustments, management needs
to address the risk that data may be modified or lost during transfer, or input, to this new spreadsheet.
12
Refer to section 11.3.3 of our ASC 842 FRD for lessee accounting guidance on the treatment of leases previously classified as
operating leases under ASC 840 that remain operating leases under ASC 842 during transition.
13
under ASC 840.
14
Refer to section 11.3.1 of our ASC 842 FRD for lessee accounting guidance on the treatment of leases classified as capital leases
under ASC 840 that are classified as finance leases under ASC 842 during transition.

On the other hand, if the entity’s existing controls over the completeness and accuracy of the lease data are not
effective (i.e., are not sufficiently precise to address the risk of material misstatement in the implementation
of ASC 842) or management doesn’t have existing controls, management would need to implement new
controls to make sure the lease data is complete and accurate. For example, management’s review of the
supporting schedules for the lease commitment note to the financial statements under ASC 840 may not
have been performed at a threshold that would be sufficiently precise when applying ASC 842. Management
may have waived differences between the lease contracts and the information reported in the lease
commitment note that could be material now that an ROU asset and lease liability will be recorded.
The following is an example WCGW related to the data that is used to apply the transition provisions for
entities that elect the package of practical expedients:
Example WCGW — data that is used to apply the transition provisions

• The lease data used to calculate the transition adjustments does not agree with the terms and
conditions of the contract. (E/O, C, M/V, R/O)
2.3.2.1 Risks when additional lease contracts are identified during management’s assessment of
completeness
If management identifies contracts that should have been accounted for as a lease under ASC 840
(e.g., leases previously accounted for as executory contracts, embedded leases that weren’t identified), it
will need to evaluate the accounting for the contract pursuant to ASC 840, including:
• Lease classification
• Identification of lease and non-lease elements and allocation of the payments and other
consideration
• Unamortized initial direct costs as of the date of initial application (or the lease commencement date,
if later)
• For operating leases, the remaining lease term as of the date of initial application (or the lease
commencement date, if later)
• For operating leases, the remaining minimum rental payments 15 as of the date of initial application
(or the lease commencement date, if later)
• For capital leases, measurement of the remaining capital lease obligation and asset as of the date of
initial application (or the lease commencement date, if later)
Management will also need to consider whether any of the following are present for operating leases
(since they will affect the lease liability or ROU asset amounts)
15
under ASC 840.

The following is an example WCGW when management identifies a contract that should have been
accounted for as a lease under ASC 840 as part of its assessment of completeness even when the
package of practical expedients is elected:
Example WCGW — assessment of additional lease contracts identified in

implementation
• For contracts that should have been accounted for as a lease under ASC 840, the lease is not
properly classified by the lessee. (E/O, M/V, R/O)
Refer to section 3.4.1.2.1, Address risks when additional lease contracts are identified during
management’s assessment of completeness, for further information on what we do when we identify a
prior-period error during implementation.
2.3.3 Risks related to applying the ASC 842 transition provisions

Once management has identified a complete population of leases and captured the information needed
to apply the transition provisions, the entity will calculate the transition adjustments. All entities will face
the risk that the determination of the ROU asset and lease liability is not calculated in accordance with
the transition provisions of ASC 842 (refer to section 1.5, Transition accounting considerations, for a
summary of the transition provisions).
Management will need to consider certain risks resulting from the application of the transition provisions
(see example WCGWs below). The risks depend on the terms and conditions of the entity’s leases and
whether the hindsight expedient is elected. This guide addresses the more prevalent risks that audit teams
are expected to face. The transition accounting guidance differs from the prospective accounting
guidance and therefore audit teams should carefully read section 11, Effective date and transition, of our
ASC 842 FRD.
Income tax considerations

ASC 842 does not change the way an entity accounts for the income tax effects of leases under ASC 740,
Income Taxes. However, an entity may need to account for new temporary differences or changes in
existing temporary differences when it adopts the standard. The most significant change is expected for
operating leases. Under ASC 840, a lessee generally records a deferred tax asset related to the difference
between the rent expense recorded for book purposes (i.e., straight-line rent) and the amount deductible
for tax purposes. Entities will likely need to record new temporary differences for these leases when they
adopt the standard because they will be recognizing ROU assets and lease liabilities for the first time, and
those assets and liabilities will have no corresponding tax basis.
In all cases, entities will need to execute the following steps during implementation:
• Identify existing temporary differences related to all leases under ASC 840
• Identify all temporary differences once ASC 842 is adopted
• Calculate the adjustments necessary to reflect the post-adoption deferred tax amounts
• Evaluate the need for a valuation allowance for any new deferred tax assets recorded upon adoption
Entities with significant lease portfolios, especially leases in multiple jurisdictions, should not
underestimate the effort this process may require.

Estimates
Another area that will present risk is determining the discount rate used to measure lease liabilities for
operating leases. The definition in ASC 842 of the rate that must be used is different than the guidance in
ASC 840. Also, the discount rate must be estimated on a lease-by-lease basis, unless the portfolio approach
is used. Refer to section 3.4.1.3.1, Testing the discount rate in implementation, for a discussion of how
the standard defines the discount rate and guidance on how to test the discount rate.
Entities that elect the hindsight practical expedient will need to determine the lease term based on facts
and circumstances through the effective date.16
The following table lists example WCGWs in applying the transition provisions of ASC 842, assuming the
lessee elects the package of practical expedients:
Example WCGWs — applying the transition provisions

• The entity elects to apply the hindsight practical expedient but does not appropriately reassess the
lease term based on all facts and circumstances through the effective date. (M/V, P/D)
• The entity does not use an appropriate discount rate to measure the lease liability. (M/V, P/D)
• The entity does not appropriately measure the lease liability. (M/V, P/D)
• The entity does not appropriately measure the ROU asset. (M/V, P/D)
• The entity does not appropriately account for the income tax effects of adopting the new standard.
(M/V, P/D)
2.3.4 Additional risks arising from the use of IT in the implementation

Many entities may find that their existing IT systems are not adequate to support the calculation of the
transition adjustments and/or the prospective accounting for and disclosures about leases under the new
standard. Other entities may not currently have an IT system for lease accounting and disclosure but
may determine that one is necessary to meet the requirements of the new standard.
Additional risks need to be addressed if an entity implements new systems or modifies its existing systems.
Audit teams should read our Audit Matters publication, System implementations can create new risks that
we need to address in our audits, issued on 17 October 2017, which discusses in more detail the risks that
exist when an entity implements new systems. In these situations, we should consider the following
example WCGWs:
Example WCGWs — new or modified IT systems

• Lease data is not transferred completely and accurately from the entity’s current system to the
new system. (C, M/V)
• The entity’s new or modified IT system does not function in a manner that complies with the
requirements of ASC 842. (C, M/V, P&D)
• Unauthorized users have access to an entity’s new or modified IT system. (C, M/V)
• New or modified system interfaces (e.g., from a lease administration system to a lease accounting system)
do not transfer information between IT applications or databases completely or accurately. (C, M/V)
• Configurations that customize a new or modified system are not appropriate (e.g., they don’t
reflect policy elections that affect the computations performed by the system). (C, M/V)
16
See the guidance in section 2.3 of our ASC 842 FRD for a discussion of evaluating the lease term.

During the transition to the new leases standard, some entities might use manual processes until
automated processes and controls are implemented. Audit teams should be aware that manual
calculations (e.g., using an Excel spreadsheet to perform complex calculations) often have a higher
inherent risk than automated calculations subject to effective ITGCs. It also may be difficult for entities
with a large number of leases to maintain spreadsheets to track lease data and make the necessary
computations and disclosures.
2.3.4.1 Use of service organizations (added July 2018)

When the entity uses a service organization as part of its implementation, it must consider the risks that
arise from the part of the process or processes performed by the service organization. Because many
entities did not use a service organization to help them perform their accounting under ASC 840, it is
important for the entity to understand how using a service organization will affect the risks associated
with the implementation and prospective accounting processes. Some of the risks previously discussed in
this section may relate to processes performed by the service organization and therefore may be
addressed by controls at the service organization.
Entities may use lease accounting software that is provided and hosted by a third party (i.e., under a
software-as-a-service or SaaS arrangement). The risks resulting from a SaaS arrangement include the
risks that arise from implementing a new system which were discussed in the previous section.
Refer to the discussion of considerations when relying on a SOC 1 report in section 3.5.1, Addressing
risks when management uses a service organization.
2.3.5 Risks related to management’s disclosures

Entities that are SEC registrants need to comply with SAB Topic 11.M, which requires disclosure of the
anticipated effects of new accounting standards if the effects are known. As with any other disclosure, a
registrant must design controls to assess the completeness, accuracy and adequacy of these disclosures.
The SEC staff has monitored registrants’ disclosures about the effect of adopting recently issued
accounting standards (e.g., ASC 606) and, in some cases, is requesting expanded disclosures. We expect
the SEC staff to focus on registrants’ disclosures related to the new leases standard in their filings prior
to the effective date. Refer to section 3.4.1.4, Evaluate management’s disclosures during the transition
period, and Appendix D, SAB Topic 11.M disclosures, for further discussion of the audit considerations
for SAB Topic 11.M disclosures.
Example WCGW — management’s disclosures about adoption

• The entity’s disclosures prior to the effective date do not comply with SAB Topic 11.M. (C, P&D)
2.3.6 Identify significant risks, including fraud risks

Significant risks
A significant risk is an inherent risk with a higher likelihood of occurrence and a higher magnitude of
potential misstatement in the financial statements. Lessees will recognize ROU assets and lease liabilities
relating to operating leases for the first time and these amounts could be multiples of planning materiality
(PM). We consider the guidance in EY GAM UTB Understand the Business 4 when making an assessment
about whether this represents a significant risk. We also consider the same factors discussed in section 1.6,
Effect of implementation on our audit approach and planning, related to our CRA to determine whether
factors that represent a higher inherent risk also represent a significant or fraud risk.

Fraud risks
Although the implementation of the new standard is not expected to have a significant effect on most
entities’ reported earnings, teams should still consider whether the implementation could pose new or
heightened fraud risks. It is important for the team to discuss how management could perpetrate and
conceal fraud, including omitting or presenting incomplete or inaccurate disclosures. When making this
assessment, we consider the guidance in EY GAM FRAUD-RISK.
Some of the factors that may cause an audit team to identify a fraud risk include:
• Entities are incentivized to minimize the amounts of their reported assets or liabilities due to debt
covenants or other key financial ratios.
• Nonfinancial management participates excessively in the selection of accounting policies or the

determination of significant judgments related to the implementation of ASC 842.
• Management attempts to justify marginal or inappropriate accounting on the basis of materiality.

3 Design and execute tests of controls and
substantive audit procedures
Auditing the implementation

1
To be completed by June 2018 November 2018 Year end 2018
3. Develop
preliminary 4. Evaluate design 5. Perform
audit strategy and test controls substantive testing
3.1 Develop and execute our audit strategy

Our preliminary audit strategy for the implementation of ASC 842 needs to include our plan to evaluate
management’s ICFR related to the implementation, if we are performing an integrated audit or using a
controls reliance strategy. That includes evaluating how management addresses the risks related to
determining the transition adjustments and making adequate quantitative and qualitative disclosures
about the effect of adoption (i.e., SAB Topic 11.M disclosures). We also need to plan substantive audit
procedures that address these risks. Our audit procedures should also consider our evaluation of
management’s policies, processes and controls for implementing ASC 842 and its policies, processes and
controls for the prospective accounting under ASC 842 to be implemented in the quarter of adoption.
Executive involvement during the development of our preliminary audit strategy is critical because of the
implementation risks relating to the standard’s transition provisions.
This section provides guidance on the nature and extent of our audit procedures. It also provides example
controls management may implement to address the risks outlined in section 2, Understand the entity’s
process and identify risks, and example substantive procedures we may perform. However, the examples
are not intended to be all-inclusive. Teams need to design an audit strategy that responds to the risks they
identify for a particular client.
Team events and Project Insight

Teams on audits of public entities will need to complete two team events during the transition period that
are designed to encourage all professionals working on the audit of the implementation, including FAIT and
Tax, to hold meaningful discussions about the team’s audit strategy. At both events, the team will discuss
considerations for the critical stages of our audit.
Teams performing integrated audits are required to use Project Insight to understand the critical path of
the implementation SCOT and the design of controls. The two team events will satisfy the team meeting
requirements of Project Insight.
Teams auditing calendar-year entities are expected to complete Leases Team Event 1 by 30 June 2018.
Teams will discuss their understanding of the entity’s leasing activities, their initial evaluation of the
effect of the new standard and the entity’s implementation plan for ASC 842. Based on this discussion,
teams will identify the risks relating to the implementation, develop an expectation of the relevant
controls and develop a preliminary audit strategy. Upon completion of Team Event 1, teams on integrated
audits will have completed Step 1 of Project Insight with respect to the implementation SCOT, which will
include (1) developing a preliminary placemat depicting the steps in the critical path, including IT

applications and the flow of data, (2) identifying points where misstatements can occur (i.e., WCGWs), (3)
identifying controls that mitigate the WCGWs and (4) identifying information produced by the entity (IPE)
used in those controls. To maximize the effectiveness of Team Event 1, it is important for teams to have
a thorough understanding of management’s implementation plan before the meeting. The Team Event 1
preparation checklist, among other things, includes a series of questions that teams can ask management
to prepare for the team event.
Teams auditing calendar-year entities are expected to complete Leases Team Event 2 by 30 November
2018. This event is designed to assist audit teams in reviewing the results of our evaluation of the design
and operating effectiveness of implementation controls, reassessing the risks identified in Team Event 1, or
any new risks, and evaluating our plan for substantive testing based on these assessments. In preparation
for Leases Team Event 2, teams on integrated audits need to complete Step 2 of Project Insight, which is
the walkthrough of the implementation SCOT. This includes confirming our understanding of the critical
path, assessing whether management’s controls address the identified risks, including whether there are
any missing controls, and validating that the evidence obtained during the walkthrough and related
documentation is commensurate with the importance and risk of the controls. Step 3 of Project Insight will
be completed during Team Event 2 when teams confirm that the audit strategy is responsive to the CRA
and information obtained during the walkthrough.
Typically, the steps of Project Insight are completed within a short timeframe. However, since it may take
management several months to implement the new standard, the time between the steps may be greater
than is typically expected under Project Insight.
Considerations related to our walkthrough of the implementation SCOT

As required by EY GAM, we perform a walkthrough of management’s implementation SCOT in order to
confirm our understanding of the processes and procedures in place and to assess whether we have identified
all of the risks of material misstatement. If we are also walking through controls as part of an integrated audit
or controls reliance strategy, or walking through relevant controls over significant risks, highly automated
SCOTs and journal entries that are part of the financial statement close process (FSCP), we confirm our
understanding of the design of the controls that are relevant to our audit and to the risks identified.
As discussed in section 1.2, Leases audit roadmap for lessees, the steps for auditing the implementation
of ASC 842 are presented sequentially to align with EY GAM. However, teams may not perform the steps
in this order, and the steps may be iterative in nature due to the complexity of the implementation and
the time required by management to design and implement transition controls. Even if our clients have
not completed their own processes, audit teams should not delay in identifying risks and developing our
expectations of processes and controls. Our assessment will allow us to provide timely feedback to
management and avoid delays in our procedures that could lead to time constraints at a later point in our
audit of the implementation.
When we confirm our understanding of management review controls (e.g., management at an

appropriate level reviews the calculation of the transition adjustments prepared by another individual),
we will need to understand the scope and precision of the review, the activities performed to verify the
completeness and accuracy of data used in the control, the criteria used for identifying items for
investigation and how management follows up on these items and resolves them. While the sources of
information may vary, the evidence management collects needs to be sufficient to provide reasonable
assurance that the objective of the control is met. Our objective is to evaluate whether the judgments
made by management are reasonable and supportable.
As part of our walkthrough, we consider the competence and authority of the individuals performing the
reviews in the implementation controls, including their knowledge of ASC 842 and the transition provisions.

In our documentation, we need to describe the attributes of the control in detail to help us conclude that
the scope, procedures and precision are adequate, that IPE used in the performance of the control has
been identified and that the relevant risks of its use are addressed. Refer to our Audit Matters, Testing
management review controls and documenting our work, published on 29 September 2016, for more
information on control attributes.
3.2 Planning materiality and tolerable error considerations

An entity’s adoption of the new leases standard does not affect how we calculate PM and tolerable error (TE).
We should compute PM and TE in accordance with EY GAM for the year of adoption (e.g., 2019 for a public
entity that does not early adopt) and use that TE to establish the threshold to test the transition adjustments.
Because teams will be performing audit procedures in the periods prior to adoption, teams may find it
more practicable to use the PM and TE established in the year prior to adoption (e.g., 2018). In this case,
we need to reassess the extent of our procedures based on the PM and TE established in the year of
adoption if significant changes in PM and TE occur.
When we substantively test the disclosures required by SAB Topic 11.M that contain amounts or ranges,
we use TE related to the year the disclosures are made to perform our testing and assess errors (e.g., the
2018 TE when testing the SAB Topic 11.M disclosures in the 2018 Form 10-K).
3.3 Reminders regarding the timing of our audit procedures over the transition
adjustments and workpaper archiving
The final transition amounts will be initially disclosed in the quarter of adoption (e.g., 31 March 2019 for
a calendar year-end public entity that does not early adopt). However, in order to timely assess the
appropriateness of the transition adjustments during the transition period, we need to perform our audit
procedures shortly after management performs its processes and controls. We also need to begin to evaluate
management’s processes, policies and controls for the prospective accounting so that we are prepared to
perform a quarterly review in the quarter of adoption. Timely completion of our audit procedures over the
transition adjustments and our evaluation of management’s prospective accounting policies will also help us
review and evaluate management’s SAB Topic 11.M disclosures in the year prior to adoption.
We will finalize our auditing of the transition adjustments, including our assessment of any control
deficiencies and misstatements in the quarter of adoption.
Because teams need to perform the majority of their implementation audit procedures in the year prior
to adoption, we are likely to retain the same workpapers in multiple EY Canvas files. The following table
summarizes the workpapers that should be included in the 2018 and 2019 EY Canvas files for a
calendar-year public entity that does not early adopt.
2018 EY Canvas 2019 EY Canvas

• Workpapers that support amounts presented in the • Workpapers that support our testing and
SAB Topic 11.M disclosures in the 2018 financial conclusions over management’s implementation
statements controls and entity-level controls
• Workpapers that support our control testing over • Workpapers that support our substantive testing
management’s implementation controls and entity- over the final transition adjustments, tie-out to the
level controls reported amounts and related conclusions
• Workpapers that support our substantive testing • Workpapers that support our final evaluation of
over the transition adjustments management’s prospective accounting policies,
• Workpapers that support our evaluation of processes and controls and related conclusions
management’s prospective accounting policies, • Workpapers that support amounts presented in the
processes and controls quarterly and annual disclosures in the 2019
financial statements

3.4 Extent of testing procedures
3.4.1 Addressing identified risks of implementation
Section 2.3, Risk assessment, identifies the risks facing entities and audit teams during the implementation
of ASC 842. We discuss example controls management may use to mitigate these risks and the substantive
audit procedures teams may perform to respond to the risks below. The example WCGWs discussed in
section 2.3 are repeated in the risk/control/substantive procedure tables in the following sections.
Sections 3.4.2, Define the population of lease contracts and the sampling unit, and 3.4.3, Determine the
sample size for testing of lease contracts, discuss how we determine our strategy for stratifying the
population of leases and how we make our selection of contracts to test.
3.4.1.1 Assess the completeness of the population of leases

As discussed in section 2.3.1, Risks related to the completeness of the population of leases, the first risk
we should consider in auditing the implementation of ASC 842 is the risk that a complete population of
leases is not identified as of each reporting date in the comparative financial statements and the financial
statements for the year of adoption. For a calendar-year public entity, this would be the financial statements
for 2017, 2018 and 2019, unless the FASB finalizes the proposed optional transition method and the
entity elects to use it. The risk of completeness is greater under ASC 842 than under ASC 840 because
ROU assets and related lease liabilities for operating leases are now recorded on the balance sheet.
If we are performing an integrated audit or using a controls reliance strategy, we need to test the operating
effectiveness of management’s controls over the completeness of the population of leases. As discussed
in section 1.1, Overview, this guide assumes that our client has elected the package of practical expedients.
Entities that elect the package of practical expedients do not need to reassess whether any expired or
existing contracts are or contain leases. However, electing the package of practical expedients does not
grandfather incorrect conclusions under ASC 840 about whether a contract is or contains a lease. Thus,
if management believes that there is a risk that certain lease contracts were not identified under ASC 840,
it may need to implement new controls during the transition period to address this risk.
As a starting point, we expect entities to develop a Master Lease Schedule and reconcile the population
of leases in the Master Lease Schedule to the prior-year lease commitment disclosure under ASC 840.
However, this procedure by itself may not be sufficient to address the risk of completeness because the
prior-year lease commitment note may not have been complete, particularly if the entity did not have
well-designed processes and controls in place to identify all leases and lease modifications. We expect
that most entities will need to perform additional procedures during the implementation to address the
risk of completeness of the lease population (examples are included in the table below).
The evaluation of gaps in controls and policies between ASC 840 and ASC 842 should be performed as
early in the implementation process as possible because it may lead to additional work for both
management and the audit team during implementation.
For our substantive audit procedures, we need to test whether the population of lease contracts included
in the transition adjustments is complete. If there is a risk that lease contracts were not identified under
ASC 840, or that our risk assessment in prior years resulted in limited procedures over lease identification,
our substantive procedures during the implementation need to be more robust.
If our substantive procedures identify contracts that are leases or contain leases that are not included on
the Master Lease Schedule, we consider the effect on our evaluation of the design and operating
effectiveness of management’s implementation controls.

Refer to section 3.4.1.2.1, Address risks when additional lease contracts are identified during management’s
assessment of completeness, for controls and substantive procedures we may perform when management’s
assessment of completeness identifies new leases.
Group audit considerations

Entities with significant components and decentralized finance and procurement operations need to
consider whether this structure poses a risk to the completeness of the population of leases. Refer to
Appendix A, Group audit considerations, for more information on implementing ASC 842 for a group audit.
The following table provides example controls and substantive procedures teams may perform to
address the risks identified in section 2.3.1, Risks related to the completeness of the population of leases.
Our expectations of management’s controls and our planned substantive procedures are responsive to
the entity’s risks.
WCGWs Example controls1 Example substantive procedures1

• The entity has not • The controller reviews the reconciliation • Reconcile the Master Lease Schedule to
identified all prepared by the senior accountant of the the information in our workpapers that we
arrangements that Master Lease Schedule to the used to test the lease disclosures in the
are or contain a information used to prepare the lease prior-year financial statements. If there are
lease under commitment disclosures in the prior-year any differences, resolve the difference and
ASC 840. (C) financial statements. All reconciling assess the effect on our assessment of the
items above the review threshold are completeness of the Master Lease
investigated to determine whether the Schedule.
Master Lease Schedule is complete.
• For real estate leases, management
considers the list of properties as disclosed
in Item 2 of an entity’s Form 10-K to
determine whether any properties may
contain a ground lease or other leasing
relationship.
• The senior accountant surveys internal • If management conducts its own survey,
stakeholders (e.g., legal, finance, consider requesting to be copied on all
operations, procurement) to identify survey distribution emails and responses
contracts that may be leases or may to obtain contemporaneous evidence. If
contain leases, including any amendments we rely on management’s process,
or modifications to those contracts.2 The evaluate the list of respondents and
controller reviews the results of the conclude, based on our understanding of
survey to determine whether any the entity’s operations, that all relevant
contracts not previously considered may individuals and/or departments were sent
contain a lease and selects a sample of the survey and that they responded.
contracts to review. During the review, Obtain evidence of the follow-up
the controller makes sure the survey was performed based on survey results and
sent to the appropriate individuals within evaluate the responses and the
the entity. The controller determines conclusions reached.
whether additional follow-up is needed to • Consider performing an independent
conclude that the Master Lease Schedule inquiry of survey respondents to
is complete. confirm their responses and any
accounting implications.
• Perform an independent survey of
internal stakeholders (e.g., legal, finance,
operations, procurement) to identify
contracts that may be leases or may
contain leases.2

• The controller reviews an analysis prepared • Obtain a list of recurring vendor
by the senior accountant of recurring payments (i.e., the same amount each
vendor payments (e.g., the same amount month) from the cash disbursements
each month) obtained from the cash register.3 Based on the knowledge gained
disbursements register to determine in our prior-year audit or
whether any payments relate to a lease other procedures performed during
that was not included on the Master implementation, exclude vendors that we
Lease Schedule. As part of this review, know do not have a leasing relationship.
the controller reviews the underlying Document our rationale for excluding
contracts for a sample of recurring such vendors. For a sample of recurring
payments determined not to be leases. vendor payments, evaluate the underlying
• The controller reviews an analysis contract to determine whether the contract
prepared by the senior accountant of is a lease or contains a lease that was not
vendors that are paid each month (or on included on the Master Lease Schedule.
another recurring basis) to determine • Obtain a list of vendors that are paid each
whether the payments relate to a lease month (or on another periodic basis).3
that was not included on the Master Based on the knowledge gained in our
Lease Schedule. As part of this review, prior-year audit or other procedures
the controller reviews the underlying performed during implementation, exclude
contracts for any significant vendor vendors that we know do not have a leasing
relationships not identified as a lease. relationship. Document our rationale for
• For each analysis: excluding such vendors. For a sample of
vendors, evaluate the underlying contract to
• The controller reviews the significant
determine whether the contract is a lease or
assumptions used by the senior
contains a lease that was not included on
accountant to develop the analysis,
the Master Lease Schedule.
such as the date range or how the
preparer defined a recurring payment • For each analysis:
(e.g., the frequency of the payment or • Document the significant assumptions
whether the payment is for the same to develop the analysis such as the
amount or a range of amounts) and date range or how we defined a
the completeness and accuracy of recurring payment (e.g., the frequency
data used in the analysis. of the payment or whether the
payment is for the same amount or a
range of amounts)
Note: If the team performs both of these
substantive procedures, there may be
overlap in the vendors identified. Teams
need to consider available client data and
which analysis is most effective to achieve our
audit objective, or if both are necessary.
We are also mindful that, based on the
underlying contract, some leases may have
been executed late in the year, and no
payments may have been made until after
year end. As such, we may need to design
our procedures to identify vendor payments
that are made near year end or in the
subsequent period in order to address this
risk. We can combine this with our search for
unrecorded liabilities, which is discussed in
the procedures below.

• The controller reviews an analysis • Obtain a listing of the entity’s active
(including vendor name, service, product vendors and eliminate vendors we have
and annual payment amounts) prepared previously determined do or do not
by the senior accountant of active represent leasing relationships during our
vendors in the procurement database (or current and prior-year audits. For a
master vendor file) to identify vendors sample of the remaining vendors,
for which the entity may have executed a evaluate the underlying contract or
lease. This review includes a review of invoice and perform inquiries of the
explanations provided by the senior procurement department to identify any
accountant for each vendor in the contracts that may be a lease or may
analysis. The controller reviews a sample contain a lease.
of contracts for any significant vendor
relationships not identified as a lease.
• The entity confirms the number of • Consider whether to prepare independent
contracts and the date of each contract, confirmations to confirm the number of
including any modifications, with vendors contracts and the date of each contract,
that have a significant number of leases. including any modifications, for the
For each confirmation, the controller entity’s significant leasing relationships. If
confirms that the vendor replied to the we perform an independent confirmation,
confirmation, reviews explanations of document the resolution of discrepancies
variances between the confirmation and between the confirmation and the Master
the Master Lease Schedule and reviews a Lease Schedule.
sample of contracts not included in the
Master Lease Schedule.
Note: In determining whether obtaining
confirmations is a necessary procedure,
management will need to evaluate whether
its existing controls are sufficient to address
the risk of completeness. The purpose of
this procedure is to test the completeness
of the lease population for specific vendors
that the entity has a significant number of
leasing relationships with (e.g., copiers or
vehicles).
• The controller reviews an analysis • Select a sample of service contracts to
prepared by the senior accountant of determine whether the contracts are
service contracts not on the Master leases or contain a lease under ASC 840.
Lease Schedule to determine whether Determine that the contracts were
the contracts qualify as leases under appropriately included in or excluded
ASC 840. The controller determines from the Master Lease Schedule.
whether the contracts have been
appropriately included in or excluded
from the Master Lease Schedule.
Note: This procedure could be performed in
connection with the analysis of vendors
discussed above.

• Management obtains quarterly (or on • Obtain management’s quarterly (or on
another periodic basis) representations another periodic basis) representations
from division leaders and legal, finance, from division leaders and legal, finance,
operations and procurement personnel operations and procurement personnel
affirming that they have complied with affirming that they have complied with the
the entity’s contract processes and entity’s contract processes and controls
controls and have fully disclosed to and have fully disclosed to management
management all contracts, including any all contracts, including any modifications.
modifications. The controller confirms Evaluate the representations made,
that all representations have been including any variances between the
received, reviews explanations prepared representations and the Master Lease
by the senior accountant of variances Schedule. Evaluate a sample of contracts
between the representations and the not included in the Master Lease Schedule.
Master Lease Schedule and reviews a • As part of our general audit procedures:
selection of contracts not included in the
• Read the minutes of the meetings of the
Master Lease Schedule.
Board of Directors and its committees
for evidence of new contracts or
modifications to existing contracts.
• Perform additional inquiries of
individuals as part of our planning
and/or year-end procedures regarding
arrangements or types of contracts
that may indicate a lease. Individuals of
whom we may inquire include internal
audit, general counsel, the Board of
Directors or other accounting
department employees who are not
involved in lease accounting.
• As part of our testing of subsequent cash
disbursements to identify unrecorded
liabilities, consider new or recurring
payments in the subsequent period, new
vendors with significant payments or
other factors that indicate a lease based
on our knowledge of the entity and its
operations and the results of other
substantive procedures performed during
implementation.
• The entity has • The controller reviews surveys made of • Evaluate the responses to surveys (see the
not identified all the procurement department, legal procedures above) to identify any lease
lease and/or operations to confirm that all modifications. If any modifications are
modifications in lease modifications have been reflected identified, determine that the modification
accordance with on the Master Lease Schedule. As part of was appropriately accounted for.
ASC 840. (C) this review, the controller reviews the Note: The procedures related to vendor
accounting conclusion for the treatment of confirmation and our general audit
any previously unidentified modifications procedures and subsequent cash
under ASC 840 and confirms that disbursements can also be included in the
appropriate updates have been made to suite of procedures to address this risk.
the Master Lease Schedule.
Note: The controls related to vendor
confirmation and representations from
company personnel can also be included in
the suite of controls to address this risk.

_________________________________
1
We should consider performing dual-purpose testing, when appropriate. Reminders from EY GAM about how to use this approach
are discussed in section 3.4.3.1, Dual-purpose testing.
2
If an entity has multiple locations for legal, finance, operations or procurement or if any responsibilities are dispersed, we would
expect this survey to be sent to all individuals who may provide valuable insight. Management, or the audit team, may find our
Lease identification questionnaire useful in designing its survey of internal stakeholders. The questionnaire is part of our Leases
Diagnostic Framework. If management chooses not to use this enabler for its internal analyses of the completeness of its
population of lease contracts, management should design controls to address how it has considered the questions in this enabler.
This survey should contain sufficient background information to allow an individual without knowledge of accounting for leases to
complete the survey.
3
Before performing this analysis, teams need to consider whether the data is readily available to perform the procedure. Teams
are encouraged to contact their Regional analytics leaders and coordinators to assist in evaluating the most efficient way to
gather the data and in understanding the tools available to perform the analysis.
Attribute testing
When the objective of our procedures to test the completeness of the lease population results in a binary
“yes” or “no” conclusion (e.g., whether a contract is a lease or contains a lease), we believe that attribute
sampling is appropriate. However, when the objective of our procedures does not result in a binary “yes” or
“no” conclusion, attribute sampling is not appropriate. Attribute sampling generally results in a sample of 25
for populations larger than 250 items. Refer to EY GAM SAMPLE 2.3.4 and 4.5.3c for further information.
3.4.1.2 Assess the completeness and accuracy of the data that is used to apply the transition
provisions
Section 2.3.2, Risks related to the data that is used to apply the transition provisions, discusses the risks
associated with gathering complete and accurate data for each lease contract in the population used to
determine the transition adjustments. To respond to these risks, we and the entity may need to perform
contract reviews, unless management and the audit team are able to rely on existing controls over lease data.
The overall objective of an entity’s contract reviews, and of our audit procedures, is to confirm that the
data used to determine the transition adjustments is complete and accurate based on the underlying
contract. If an entity’s controls or our audit procedures do not adequately address this objective, the risk
of misstatement in the transition adjustments increases.
When assessing the design of management’s controls and designing our substantive audit procedures,
we consider the following:
• How the data was collected during the transition to ASC 842 (i.e., manually compiled in Excel or
maintained in and extracted from an IT system)
• The extent of evidence management has gathered to support the completeness and accuracy of the
data collected
• How the risks associated with IPE were addressed (refer to our discussion of IT systems and manual
calculations in section 3.5, Use of IT in the implementation and related data considerations)
• How management selected contracts for review (i.e., whether management reviewed all contracts on
the Master Lease Schedule or a sample, and if management used a sample, how it selected the sample)
• The nature and composition of the lease contracts selected for testing (i.e., whether there is a
significant number of contracts with the same terms or many different types of contracts)
Additional guidance and considerations for determining our sample size can be found in section 3.4.3,
Determine the sample size for testing of lease contracts.

Considerations about the entity’s historical controls over the lease data
As we are designing our audit strategy, we need to consider the entity’s existing controls over the
completeness and accuracy of the lease data (refer to section 2.3.2, Risks related to the data that is
used to apply the transition provisions, for further information). If the entity’s existing controls over the
completeness and accuracy of the lease data are effective and we tested and relied on those controls,
we may be able to eliminate or reduce the number of contracts selected to test the completeness and
accuracy of the lease data in implementation. For example, if management can provide evidence that the
existing controls over lease initiation and monitoring are sufficiently precise to address the completeness
and accuracy of the lease data, it may not need to revisit the underlying contract. But if the entity’s
existing controls over the completeness and accuracy of the lease data are not effective or we chose not
to test them, we would need to select more contracts to test the completeness and accuracy of the lease
data in implementation.
Evaluation of whether to carry forward prior-year substantive testing

When designing the nature and extent of our substantive testing over the lease data, we need to evaluate
whether we can rely on our prior-year substantive procedures. For example, if a team tested a new lease
contract in the prior-year audit (including testing the completeness and accuracy of the underlying data),
we may be able to rely on this testing to reduce the number of contracts selected for testing during
implementation.
When we carry forward prior-year documentation to support our testing of the completeness and
accuracy of contract data, we follow EY GAM DOC + ARC 2.4.
Data gathering for disclosures under ASC 842

As part of the process to gather complete and accurate data for its lease contracts, management needs
to consider the expanded disclosure requirements of ASC 842. In order to prepare for these disclosures,
management needs to perform a gap analysis between the current disclosure requirements and those
under the new standard and determine the additional information that will be needed and that can be
gathered while performing its implementation procedures. For example, management will need to disclose
information about the determination of the discount rate for its leases, the weighted average discount
rate, the short-term lease cost and the weighted average lease term.
As part of our substantive procedures during the implementation, we need to understand management’s
gap analysis and its plan for prospective disclosures. This may include reading draft disclosures prepared
by management or reviewing schedules prepared to support future disclosures as part of our procedures
over the completeness and accuracy of lease data.

When designing our testing of lease data in a group audit, we may test controls at the entity, regional or
component level or a combination of these depending on the precision of the design of the controls at
each location. Refer to Appendix A, Group audit considerations, for more information about our strategy
for a group audit.
The following table provides example controls and substantive procedures to address the risks related to
the lease contract data identified in section 2.3.2, Risks related to the data that is used to apply the transition
provisions. For existing capital leases under ASC 840, the audit team should consider the procedures
performed in prior-year audits and evaluate if additional procedures are needed (e.g., if the hindsight
practical expedient is elected), considering that those were already recognized on the balance sheet.

Our expectations of management’s controls and our planned substantive procedures must be responsive
to the entity’s risks and other facts and circumstances.
WCGW Example controls 1 Example substantive procedures 1

• The lease data • The controller reviews a memo • For a sample of contracts, perform a
used to calculate summarizing management’s strategy to contract review and compare the data
the transition test the completeness and accuracy of (e.g., the term of the contract at
adjustments does the data used to calculate the transition inception or modification, the remaining
not agree with adjustments, including an analysis of term of the contract as of the evaluation
the terms and existing controls over lease data and date and the remaining minimum rental
conditions of the whether relevant data was obtained from payments as of the evaluation date) in
contract. (E/O, C, the contract or another data source2 the Master Lease Schedule to the
M/V, R/O) (e.g., a lease management system). original contract (or modified contract,
• For a sample of contracts, the controller if applicable). Evaluate relevant clauses
reperforms the procedures performed by in the contract that could affect the
the senior accountant. For each lease, determination of the key inputs
the senior accountant compares the data (e.g., read the description of variable
(e.g., the remaining term of the contract payments in the contract to determine
as of the evaluation date and the whether they were appropriately
remaining minimum rental payments as excluded or included in the minimum
of the evaluation date) in the Master rental payments under ASC 840).
Lease Schedule to the original contract Note: See discussion above regarding
(or modified contract, if applicable) or considerations in determining whether we
other data source.2 Any differences are can carry forward prior-year audit work to
investigated. support our testing of data in the Master
Lease Schedule.
_________________________________
1
2
If another data source is used to support completeness and accuracy, management considers controls over the IPE in that data
source and documents these considerations in the memo summarizing the contract review strategy.
3.4.1.2.1 Address risks when additional lease contracts are identified during management’s
assessment of completeness
As discussed in section 2.3.2.1, Risks when additional lease contracts are identified during management’s
assessment of completeness, if a contact has been identified that should have been accounted for as a
lease under ASC 840, management will need to evaluate the accounting for the contract pursuant to
ASC 840.
Management’s controls and our procedures need to address the following under ASC 840:
• Lease classification
• Identification of lease and non-lease elements and allocation of the payments and other consideration
• Determination of the unamortized initial direct costs as of the date of initial application (or the lease
commencement date, if later)
• For operating leases, the determination of the remaining lease term as of the date of initial
application (or the lease commencement date, if later)
• For operating leases, the determination of the remaining minimum rental payments5 as of the date of
initial application (or the lease commencement date, if later)
• For capital leases, the measurement of the remaining capital lease obligation and asset as of the date
of initial application (or the lease commencement date, if later)

Management will also need to consider whether any of the following are present for operating leases
(since they will affect the lease liability or ROU asset amounts):
As part of our audit procedures (i.e., contract analyses), we need to evaluate contract provisions that may
indicate that any of these items exist and need to be included in the calculation of the transition adjustments.
When we identify an error or errors in the prior period that do not relate to the adoption of ASC 842
(e.g., incorrect lease classification under ASC 840), we should follow the guidance in EY GAM MISSTATE 3.2.
The following table provides example controls and substantive procedures to address the risks relating to
the identification of lease contracts during implementation. Our expectations of management’s controls
and our planned substantive procedures are responsive to the entity’s risks.
WCGW Example control 1 Example substantive procedure 1

• For contracts • From an analysis prepared by the senior • For a sample of contracts that should
that should have accountant that determines the have been accounted for as a lease,
been accounted classification of leases, the controller perform a contract analysis and
for as a lease selects a sample of leases and reviews determine that the lease was
under ASC 840, the underlying contract to determine appropriately classified under ASC 840.
the lease is not whether the lease has been properly Note: After testing the lease classification, we
properly classified as an operating or capital lease. need to test the completeness and accuracy
classified by the of the lease data and the calculation of the
lessee. (E/O, transition adjustments for all leases on the
M/V, R/O) Master Lease Schedule. Refer to the
discussion in 3.4.3, Determine the sample
size for testing of lease contracts, for
further information.
_____________________
1
3.4.1.3 Apply the ASC 842 accounting framework and determine transition adjustments and
disclosures
As discussed in section 2.3.3, Risks related to applying the ASC 842 transition provisions, audit teams
and management need to address the risks of incorrectly applying the ASC 842 guidance to contracts to
calculate the transition adjustments. The incorrect application of the guidance in ASC 842 could result in
a material misstatement, particularly for operating leases because of the new requirement to recognize
an ROU asset and a lease liability.
Management may elect some or all of the transition practical expedients permitted under the standard.
We need to be aware of management’s plans to elect the practical expedients and consider them when
assessing management’s controls and designing our audit procedures over the transition adjustments.
As discussed in section 1.1, Overview, this guide assumes that entities will elect the package of practical
expedients; however, the calculation of the transition adjustments will also depend on whether management
will elect any of the other transition practical expedients (e.g., hindsight) or whether it will make other
accounting policy elections such as to apply the short-term lease exception.

Entities may elect hindsight when they believe the effect of the election would result in shorter lease
terms, which would lead to lower lease liabilities being recognized on the balance sheet. For example,
retail companies may benefit from this election if they plan to move or close locations and not exercise
renewal options that they previously included in the lease term under ASC 840 after concluding that they
were reasonably certain to exercise them. However, entities should evaluate both the drawbacks and
benefits of electing the hindsight practical expedient. The election of hindsight could make transition
more complex because it would require entities to reassess the lease term for all leases considering all
facts and circumstances that have changed, through the effective date. In addition, the entity would also
need to reevaluate the useful lives of leasehold improvements.
In an integrated audit or when we use a controls reliance strategy, we evaluate the design and operating
effectiveness of controls over the computation of the transition adjustments, including management’s
considerations in instances where the standard requires judgment. We expect that management’s suite
of controls may vary based on the classification of existing leases because the implementation WCGWs
are different for each classification. For example, many of the risks identified in section 2.3.3, Risks
related to applying the ASC 842 transition provisions, are specific to operating leases, such as establishing
a discount rate for existing leases (the discount rate was established at lease inception for capital leases
and no further evaluation of that rate is required in transition unless the entity elects to apply the
hindsight practical expedient and concludes that the lease term has changed).
Our substantive audit procedures are also designed to test whether the lease liability and ROU asset are
fairly stated based on the transition provisions of ASC 842 and management’s election of practical
expedients. While testing the balance sheet effect of the lease contracts, we should also evaluate the
income statement effect, such as lease expense, interest expense and amortization expense. This will
include testing the amortization schedules for the ROU assets and lease liabilities. Under the transition
requirements of ASC 842, entities will generally “run off” their expense recognition for leases that
existed before the effective date when lease classification does not change.
How an entity calculates the transition adjustments will depend on entity-specific facts and circumstances.
The approach may be highly automated (i.e., the entity may calculate the transition adjustments using a
system-based solution) or manual (i.e., the entity uses a spreadsheet to calculate the transition adjustments
for each lease). The example controls and procedures discussed in this section relate to all situations,
regardless of whether the calculations are performed manually in Excel or in an automated system.
However, we need to be alert to the risks that need to be addressed and the controls that need to be
performed, including ITGCs, if IT is used in this phase of the implementation of ASC 842. We also need to
perform appropriate substantive procedures to address the risks related to use of IT in the implementation.
This is discussed further in section 3.5, Use of IT in the implementation and related data considerations.
Income tax considerations

As previously discussed in section 2.3.3, Risks related to applying the ASC 842 transition provisions, there
will be tax-related effects of the adoption of the standard that will affect the calculation of associated
deferred tax assets and liabilities. Furthermore, the tax effect of the transition adjustments on prior
periods that are recast will also need to be considered if the entity presents the transition adjustments
in the prior comparative periods in the year of adoption. We should involve our tax professionals in our
discussions with management as well as our planning of procedures to address the tax-related risks.

When designing our testing of the calculation of the transition adjustments in a group audit, we may test
controls at the entity, regional or component level or a combination of these depending on the precision
of the design of the controls at each location. Refer to Appendix A, Group audit considerations, for more
information about our strategy for a group audit.

This table lists example controls and substantive procedures to address the risks identified in section 2.3.3,
Risks related to applying the ASC 842 transition provisions. Teams need to understand the transition
provisions of ASC 842 to determine whether the risks, example controls and example substantive
procedures apply.
Our expectations of management’s controls and our planned substantive procedures are responsive to
the entity’s risks.
WCGWs Example controls 1 Example substantive procedures 1

• The entity does • The Head of Treasury reviews and • Read management’s accounting policies
not use an approves the estimated incremental for implementing ASC 842, including any
appropriate borrowing rate for each lease in the election of available practical expedients,
discount rate to Master Lease Schedule based on entity- or other accounting policy elections, that
measure the lease specific factors. The review considers all lease classifications (i.e., operating,
liability. (M/V, P/D) the entity’s corporate borrowing rate capital) are addressed and determine
• The entity does and expectations of adjustments that whether the policies are appropriate
not appropriately are necessary. considering the guidance in the standard.
measure the lease • The controller reviews and approves • Recalculate the transition adjustments
liability. (M/V, P/D) management’s accounting policies for for a sample of leases (this sample should
• The entity does implementing ASC 842 to make sure the be the same sample used to test the
not appropriately entity’s election of available practical completeness and accuracy of data; refer
measure the ROU expedients, or other accounting policy to the discussion of sample size in section
asset. (M/V, P/D) elections, are appropriately documented, 3.4.3, Determine the sample size for
that all lease classifications (i.e., operating, testing of lease contracts) by performing
capital) are addressed, and that the the following procedures:
policies are appropriate considering the
transition guidance in the standard. • Agree terms previously tested in the
Master Lease Schedule (e.g., remaining
• The controller reviews the leases in the
lease term, remaining minimum rental
Master Lease Schedule, which was
payments) with the calculation
prepared by the senior accountant, to
determine that the transition adjustments • Test the reasonableness of the
were properly calculated under ASC 842 discount rate used in the calculation.
and in accordance with the implementation This may include performing a
accounting policies. The scope of the sensitivity analysis of the lease liability
review focuses on whether: to changes in the discount rate or
involving EY Transaction Advisory
• The discount rate used in the
Services (TAS). Refer to section
calculation of the transition
3.4.1.3.1, Testing the discount rate in
adjustments was reasonable.
implementation, for further
• The ROU asset and lease liability considerations, including procedures
were appropriately calculated based to perform if management uses the
on a review of a sample of operating portfolio approach.
leases and finance leases, including
• Determine that the transition
assessing any differences between
adjustments (e.g., ROU asset, lease
the lease liability and the ROU asset.
liability) and any differences between
• The total transition adjustments the lease liability and the ROU asset
reconcile to the amounts recognized were calculated pursuant to the
on the balance sheet and income provisions of ASC 842.
statement in the quarter of adoption.
• Consider the procedures performed in
The controller follows up on any prior-year audits to test the amounts
differences identified during the review previously recognized on the balance
until such differences are resolved. sheet (e.g., prepaid or accrued lease
• When using the portfolio approach payments, unamortized initial direct
(e.g., applying one discount rate for all costs, capital lease asset and obligation)
leases of underlying assets with similar and evaluate if additional procedures
remaining lease terms and minimum are needed (e.g., if the hindsight
rental payments), the controller reviews practical expedient is elected).
an analysis prepared by the senior

WCGWs Example controls 1 Example substantive procedures 1
accountant that supports the conclusion • Agree the total ROU asset and lease
that applying the portfolio approach liability for operating and finance leases
doesn't produce a materially different to the amounts recognized in the
result from applying the guidance to balance sheet in the quarter of adoption.
individual leases. (Refer to section Test that the income statement effect is
3.4.1.3.1, Testing the discount rate in properly calculated and recorded.
implementation, for further information Note: If the entity does not elect to apply
on the portfolio approach.) the hindsight practical expedient, the
• The controller reviews the journal entries amounts presented in the income statement
to record the transition adjustments by for existing leases should not change from
agreeing the amounts to those calculated the amounts previously reported for the
in the Master Lease Schedule. prior comparative periods presented in the
financial statements for the year of
adoption (i.e., 2017 and 2018 for a PBE
that does not early adopt).
• The entity elects • For each lease, the senior accountant • Obtain management’s calculation of the
to apply the assesses whether the use of hindsight revised lease term and supporting
hindsight practical would change the lease term. For a documentation and analyses for the
expedient but sample of leases, the controller reviews entity’s population of leases. For a
does not the assessment of the lease term to sample of leases, determine whether the
appropriately determine that the judgments made for revised lease term is appropriate
reassess the lease individual leases have appropriate considering the facts and circumstances
term based on all support and comply with the identified by management.
facts and requirements of ASC 842. For the • Based on our knowledge of the entity or
circumstances sampled leases, the controller reviews information obtained from other audit
through the the preparer’s assessment of facts and procedures, determine whether there are
effective date. circumstances through the effective other events that occurred prior to the
(M/V, P/D) date and reperforms the calculation of effective date that should be considered
the effect of any change in lease term to in the determination of the lease term.
the ROU asset, lease liability and lease
expense. Follow-up is performed for
• Based on the revised lease term, determine
that the ROU asset, lease liability and lease
differences identified during the review
expense were properly calculated.
until such differences are resolved.
• The entity does • Management (e.g., tax director or tax • Obtain the analysis of temporary differences
not appropriately manager) reviews the analysis of related to all leases. Determine whether the
account for the existing temporary differences related identified existing temporary differences
income tax effects to all leases, the calculation of deferred and the calculation of deferred taxes upon
of adopting the taxes upon adoption for each tax-paying adoption for each tax-paying component
new standard. component at the jurisdiction level, any at the jurisdiction level are appropriate.
(M/V, P/D) adjustments to reflect the deferred tax Determine whether any adjustments to
amounts upon adoption, and the reflect the deferred tax amounts recorded
assessment of recoverability for any upon adoption are appropriate.
new deferred tax assets recorded upon • Test the mathematical accuracy of the
adoption. calculations.
• Obtain the analysis of whether a valuation
allowance is necessary for any new
deferred tax assets recorded and evaluate
whether positive evidence outweighs
negative evidence in determining the need
for and amount of a valuation allowance.
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1

3.4.1.3.1 Testing the discount rate in implementation (updated July 2018)
The discount rate is a key assumption in measuring the lease liability for operating leases and typically
will involve judgment and estimation. In addition, the discount rate is estimated on a lease-by-lease basis,
which may create higher inherent risk if the entity has a significant number of leases.
Lessees are required to use the lessor’s rate implicit in the lease if that rate can be readily determined.
We believe that lessees often will be unable to determine the rate implicit in the lease. When the lessee
cannot readily determine that rate, the lessee uses its incremental borrowing rate (IBR). In this section,
we have assumed that lessees will use their IBR as the discount rate. Lessees that are not PBEs are
permitted to make an accounting policy election to use a risk-free rate for the initial and subsequent
measurement of lease liabilities.
This section is designed to help teams plan their substantive audit procedures to test the IBR and
evaluate management’s control attributes around the IBR estimation if we are performing an integrated
audit or taking a controls reliance strategy.
Our evaluation of management’s controls over estimating the IBR should consider the competence and
authority of the individual or third-party specialist performing the estimation process. If management
uses a specialist, we need to follow the guidance in EY GAM SPECIALIST. Our expectation of the level of
effort required by management to support its selection of the IBR will depend on how management
determines the rate, as discussed below.
General discount rate discussion

Management will measure the lease liability for operating leases as the present value of the sum of
(1) the remaining minimum rental payments and (2) any amount it is probable a lessee will owe under a
residual value guarantee. The IBR is established at the later of (1) the date of initial application or (2) the
commencement date of the lease. For leases that existed at the date of initial application, a lessee can
elect to use either of the following periods to measure its IBR:
• The total lease term measured at lease inception under ASC 840
• The remaining lease term as of the date of initial application
This election should be applied consistently to all operating leases.

For example, assume Lessee entered into a lease for a 20-year term commencing on 1 January 2005
and the date of initial application is 1 January 2017. Lessee could elect to determine its incremental
borrowing rate as of 1 January 2017 based on a 20-year term (i.e., the total lease term) or on an eight-
year term (i.e., the remaining lease term as of the date of initial application).
Considerations in auditing the estimation of the IBR

The IBR is the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a
similar term an amount equal to the lease payments in a similar economic environment. In other words,
this is an entity-specific collateralized borrowing rate. In addition, for purposes of determining its IBR, a
lessee should assume that the lender would have recourse to its general credit in addition to the
collateral. Based on this guidance, two entities could enter into the same lease (e.g., same term, same
asset, same payment structure) but estimate different IBRs.
The determination of the IBR is likely to involve estimation, which will require the audit team to assess
the level of estimation uncertainty and categorize the estimate consistent with EY GAM ESTIMATES.
When evaluating the level of estimation uncertainty and designing the nature and extent of our testing of
the IBR, teams should consider the following questions:
• Is the measurement of the lease liability sensitive to a change in the incremental borrowing rate?
Audit teams should consider performing a sensitivity analysis to understand the threshold at which a
change in the IBR would materiality affect the amount of the lease liability. This threshold will
decrease as the term of the lease lengthens and the amount of lease cash flows increase. If the lease
liability is highly sensitive to changes in the discount rate, our procedures to test management’s IBR
will need to be more extensive.
Teams should keep in mind that during implementation, the lease liability will likely be more sensitive
to changes in the IBR than it will be in the prospective period. This is because entities will be initially
recognizing all of their operating leases on the balance sheet for the first time on the date of initial
application. In the prospective period, entities will only need to estimate the IBR for new leases or
existing leases that are modified or remeasured.
• Does the entity have observable debt transactions on which to base its estimation of the IBR?
If management is able to leverage existing borrowings to estimate the IBR, we consider (1) the extent
to which the debt borrowing reflects the collateral of the leased asset, (2) any differences between
the term of the debt and the term of the lease, (3) whether the debt reflects the current market
environment (e.g., prevailing interest rates at the time the IBR is estimated), (4) whether the
currency of the debt is consistent with the currency of the lease payments and (5) whether the debt
reflects the credit risk of the entity obligated to make the lease payments (i.e., parent or subsidiary;
refer to the discussion of this consideration below).
Management needs to estimate the IBR using a collateralized borrowing and adjust the rate as it
considers the factors above. We expect that the IBR would be lower than the corporate unsecured
rate due to the addition of collateral.
When the entity does not have observable debt transactions, estimating the IBR becomes more
challenging. In this case, the entity would need to assess its overall credit risk and then evaluate
corporate borrowings from entities of similar credit risk based on the circumstances of the lease.
We would generally expect management to engage a third-party specialist if the entity does not have
a sophisticated treasury department. The audit team may involve TAS, depending on the level of
estimation uncertainty and evidence provided by management to support the estimated IBR.

• What is the variation in the type of assets leased, the lease terms and the lease payments within the
entity’s lease portfolio?
ASC 842 applies to individual lease contracts. Thus, as the variation in the lease portfolio increases,
the complexity of the estimation process increases. The FASB acknowledged these concerns in the
Basis of Conclusions (BC 120), which states that an entity can use a portfolio approach when “the
entity reasonably expects that the application of the leases model to the portfolio would not differ
materially from the application of the leases model to the individual leases in that portfolio.”17
An entity may consider applying the portfolio approach to estimate the IBR if it has a large number
of leases of similar assets with the same lease terms. For example, assume Lessee entered into
200 individual leases of vehicles, each with a term of four years. Further assume that the vehicles were
of the same make and model, subject to the same terms and were executed within the same month
(and rates have not changed significantly in a month). If Lessee concludes that it is able to estimate
the IBR for the 200 leases using a portfolio approach, it would apply a single discount rate to the
200 leases when determining the transition adjustment. If Lessee applies the portfolio approach to
estimate the IBR, it is important for the audit team to understand how Lessee grouped contracts with
similar terms and conditions and to obtain support from management that the effect of applying the
leases model to a portfolio of contracts would not differ materially from the application of the leases
model to individual leases in that portfolio.
• Is the IBR being estimated for a subsidiary?
The FASB indicated in the Basis for Conclusions (BC 201) that it might be appropriate in some cases
for a subsidiary to use its parent’s IBR as the discount rate. For example, if a subsidiary does not
have a separate treasury function, and the entity’s funding is managed centrally at the parent’s level,
the lease negotiation may result in the parent entity providing a guarantee of the lease. In this
circumstance, use of the parent’s IBR would be appropriate. Absent the aforementioned considerations, a
subsidiary may have a different IBR than the parent entity or another subsidiary entity.
Use of TAS in auditing the IBR

It is the responsibility of the audit team to conclude whether management’s estimate of the IBR is
reasonable. We may consider involving TAS based on the estimation uncertainty. When the team involves
TAS, we need to follow the guidance in EY GAM SPECIALIST.
Timely coordination between the audit team and TAS is critical. It is also important for the audit team to
provide TAS with sufficient information to evaluate the IBR, including (1) the lease term, (2) the cash
flows of the lease, including any items that would affect those cash flows such as the currency of the
lease payments, (3) the type of asset being leased, (4) the location of the leased asset (5) whether the
portfolio approach is being used, (6) information about the entity’s borrowings and (7) how the entity
manages its treasury function (i.e., centralized or decentralized).
Please refer to the Lease accounting contact list for a list of resources in TAS.
17
Refer to section 4.8.4 of the ASC 842 FRD for a further discussion of the portfolio approach.

3.4.1.4 Evaluate management’s disclosures during the transition period (updated July 2018)
As discussed in section 2.3.5, Risks related to management’s disclosures, the following WCGW relates to
the disclosures management must make in the transition period:
Typically, the internal controls that are in place to support an entity’s SAB Topic 11.M disclosures may
include some or all of the following, depending on the status of the entity’s implementation effort and the
nature of the disclosure:
• Controls over the contract reviews performed by management to determine the effect of the
adoption of ASC 842 on the entity’s existing lease portfolio and typical leasing transactions
• Controls over the application and disclosure of elected practical expedients
• Controls over the development and approval of the implementation and prospective accounting
policies (refer to discussion of our expectations of the prospective accounting policies in section 3.6,
Prospective accounting policies)
We will need to perform substantive testing of the estimated amounts (or range of amounts) of the
effect, once disclosed, even if the disclosure says that there is no material effect.
Refer to Appendix D, SAB Topic 11.M disclosures, for our expectations of disclosures as the effective
date nears, our expectation of management’s controls and our responsibilities.
3.4.2 Define the population of lease contracts and the sampling unit
Define the population
When defining the population of lease contracts for our substantive testing, our starting point is
determining whether the population of contracts in the Master Lease Schedule has the same
characteristics (i.e., is homogenous). To make this assessment, we consider the following from EY GAM
SAMPLING FAQs:
• Are all items in the population subject to the same or similar SCOTs and controls?
In many cases, teams may be able to conclude that management uses one process for determining
the transition adjustments for operating leases because the process to calculate the transition
adjustments is the same for all operating leases, once the lease data has been determined to be
complete and accurate. However, if this is not the case, it may be appropriate to stratify the population.
Teams should keep in mind that management may have different SCOTs and controls over
implementation and the prospective accounting, which may result in the team reaching a different
conclusion in the prospective periods.
• Are all items in the population processed through the same or similar IT systems?
Teams should consider whether the entity will use the same IT system or end user computing tool to
calculate the transition adjustments. In most instances, we expect management to calculate all of the
transition adjustments using either an IT system or Excel. However, if certain transition adjustments
are calculated using an IT system and others are calculated using Excel, we consider whether it would
be appropriate to stratify the population.

• Do we expect any potential errors identified in the sample to be consistent throughout the population?
We consider whether potential errors would be systematic and therefore appropriate to extrapolate
across the rest of the population or whether the potential error would be isolated to a certain portion
of the population. If the team concludes that the lease data is complete and accurate (which is the
starting point for calculating the transition adjustments for all leases) and that management uses one
process for determining the transition adjustments, we believe any errors would likely be systematic
and therefore would support a conclusion that the population is homogenous.
Because the process to calculate the transition adjustments is different for operating leases and capital leases
and any potential errors could not be considered systematic, teams should stratify operating leases and
capital leases into separate populations. The team would then need to evaluate whether each population is
homogenous. This analysis may result in further stratification based on specific facts and circumstances.
Determining whether the population of lease contracts is homogenous will require professional judgment.
Refer to the guidance in EY GAM SAMPLE 2.1, 3.2 and 4.3 and SAMPLING FAQs for further information.
Refer to section 3.4.1.1, Assess the completeness of the population of leases, for procedures on
assessing the completeness of the population.
Example 1 — Identifying homogenous populations
Assume that Lessee, a calendar-year public entity, elects the package of transition practical
expedients with a date of initial application of 1 January 2017. Lessee has a significant number of
operating and capital leases. Assume that:
• All of the leases were previously maintained and accounted for in Excel.
• Management’s existing controls over lease initiation and monitoring support the completeness and
accuracy of the lease data.
• Lessee will use the same process for determining the transition adjustments for all operating leases.
Lessee will use Excel to calculate the lease liability and ROU asset based on predetermined formulas.
• Lessee will use the same process for determining the transition adjustments for all capital leases.
The audit team stratifies the operating and capital leases into separate populations. The team then
determines whether the population of operating leases is homogenous. For operating leases, because
the process to determine the transition adjustments is the same, all items in the population are
processed through Excel and any errors identified would be considered systematic, the population of
operating leases is considered to be homogenous.
For existing capital leases under ASC 840 that become finance leases under 842, the audit team
should consider the procedures performed in the prior-year audits and evaluate whether additional
procedures are necessary.

Example 2 — Identifying homogenous populations
Assume that Lessee, a calendar-year public entity, elects the package of transition practical
expedients with a date of initial application of 1 January 2017. Lessee has a significant number of real
estate operating leases and various other operating leases (e.g., vehicles, computer equipment).
Assume the following:
• The real estate leases are administered by the entity’s real estate leasing department. The real estate
leases are maintained in an IT system that tracks all real estate leasing arrangements. The system has
effective ITGCs, and management’s controls over the identification and monitoring of real estate
leasing contracts support the completeness and accuracy of the data maintained in the IT system.
• All other leases are maintained in an Excel spreadsheet, and the procurement department is
responsible for identifying leasing arrangements. Management determines that it will need to
implement new controls to verify the completeness and accuracy of the lease data in the
Excel spreadsheet.
• The transition adjustments for the real estate leases will be calculated using a new IT system. For all
other leases, the transition adjustments will be calculated using Excel based on predetermined formulas.
Because the process to determine the transition adjustments is different for real estate leases and all
other leases, any errors identified could not be considered systematic. Therefore, the total population
of leases could not be considered homogenous and the real estate leases and all other leases would be
treated as separate homogenous populations.
Define the sampling unit

The sampling unit for the lease population is a lease contract. As we will need to perform testing of the
lease population at each reporting date, teams may choose to leverage the same sample of lease
contracts across all periods being audited (i.e., we will select our sample on the date of initial application
and use that sample to test all reporting periods). This is typically a more efficient approach than
selecting a sample at each reporting date for entities that have longer-term leases. If the FASB finalizes
the proposed optional transition method and the entity elects to apply it, we need to perform procedures
before the effective date and therefore cannot wait until the date of application to select our sample.
If we leverage one sample across all periods, teams need to consider any new or modified leases during
the transition period. If new or modified leases are equal to or exceed TE, teams likely will need to obtain
additional evidence (either through key item testing or representative sampling) to address the risk of
material misstatement. Teams also need to consider the risk that arises from expired or terminated
contracts during the transition period (i.e., the risk that management removes a material ROU asset and
lease liability that should still exist or the risk that management does not remove a material ROU asset
and lease liability that should not exist).
Example — Determining our sampling strategy when new leases commence during the transition period
Assume that Lessee, a calendar-year public entity, elects the package of transition practical expedients with
a date of initial application of 1 January 2017. Lessee has a significant number of five-year railcar operating
leases, none of which expire prior to 1 January 2019. Lessee also enters into 30 new railcar leases in 2017
and 40 new railcar leases in 2018. The team concludes that the population of leases is homogenous.
In this case, the team selects a sample of the five-year railcar leases as of the date of initial application and
uses that sample to perform its substantive procedures in 2017 and 2018 rather than selecting separate
samples in each of those years. In addition, the team selects key items and a sample of the new railcar
leases entered into in 2017 and 2018 to test based on the materiality of the leases in each reporting period.

3.4.3 Determine the sample size for testing of lease contracts (updated July 2018)
The following flowchart is intended to help teams design their testing strategy and determine the sample
size for the number of contracts to test. Refer to EY GAM SAMPLE 4.8 for further details on evaluating and
concluding on our sample results. As a reminder, this flowchart is not a substitution for reading this guide.
Has management’s assessment of completeness identified

additional contracts that were determined to be leases
or contain leases?
Yes (Section 3.4.1.1)
No
Select contracts to test from the
population of additional leases1 Master Lease Schedule
Test the classification of the lease No Stratify into homogenous

Is the population of leases subpopulations
(Section 3.4.1.2.1) homogenous?
(Section 3.4.2)
Operating leases (or Capital leases (or

Yes subpopulations of subpopulation of
operating leases) capital leases)
Basis to determine sample

size – ROU asset, as
adjusted2
(Section 3.4.3) Adjustments to the ROU asset2 Test balances
separately,
considering
evidence from prior
audits
Select key items, if appropriate
(Section 3.4.3)
Select a representative sample, if appropriate

(Section 3.4.3)
Perform substantive procedures over

key items and the representative sample
to test the completeness and accuracy
of the lease data and the calculation
of the transition adjustments
(Sections 3.4.1.2 and 3.4.1.3)
_____________________________________________
1
Refer to the discussion below in Considerations when additional leases are identified in management’s assessment of
completeness for further information.
2
The basis to determine the sample size is the ROU asset excluding (1) prepaid or accrued lease payments, (2) remaining balance
of any lease incentives received, (3) unamortized initial direct costs and (4) the carrying amount of an exit or disposal cost
(ASC 420) liability.

Key items and representative sampling
Our determination of sample size for the number of contracts to test will be based on the ROU asset
excluding the following:
• Prepaid or accrued lease payments
The ROU asset after adjusting for these items is the same amount as the lease liability. Thus, our testing
strategy will yield the same testing coverage of both the ROU asset and liability. In addition, since the
excluded amounts were previously recognized on the balance sheet, teams should consider relying on
their prior-year testing to support these amounts. If we determine that additional testing is necessary, we
will test these amounts separately.
Our sampling approach to address the completeness and accuracy of lease data and the calculation of the
transition adjustments will typically involve key item testing and representative sampling (as appropriate).
When we select items from the relevant population for testing, we start by selecting key items.
Key items can be significant because of their size (e.g., there is a risk of material misstatement simply
because these lease contracts contain larger lease payments) or as a result of qualitative risk factors
(e.g., contracts with a longer term could be significantly affected by the discount rate determination). It
is important to consider and document our consideration of both types of key items when designing our
procedures and why we believe these items are not representative of the population.
If there are insufficient key items from which to draw our conclusions, we perform additional procedures.
This may include extending our testing to a representative sample from the remaining population. We
use our professional judgment to determine whether to use judgmental or statistical sampling techniques
to determine the size of a representative sample. If we choose a representative sample, the extent of our
testing will depend on (1) the CRA for the relevant assertions (E and M/V), (2) the amount determined for
TE, (3) the amount of audit evidence we plan to obtain from other substantive procedures and (4) the
level of expected misstatements in our sample.
When statistical sampling is used, teams use MicroSTART as a starting point to determine a representative
sample. The factors identified in the previous paragraph become inputs into MicroSTART, in addition to
the population value (i.e., the ROU asset, as adjusted) and the value of key items.
We would use the sample selected to perform the substantive procedures (which are included in the
tables in sections 3.4.1.2 and 3.4.1.3) to test the completeness and accuracy of the data and the
calculation of the transition adjustments, which includes the lease liability and the ROU asset, and to
determine whether that the pattern of expense recognition did not change from that under ASC 840 if
the entity doesn’t elect the hindsight practical expedient.
If we are testing homogenous subpopulations of contracts (refer to section 3.4.2, Define the population
of lease contracts and the sampling unit), the testing strategy may be different for each subpopulation
(e.g., key item testing and/or representative sampling) as long as substantially all of the population is
being tested in a way that appropriately reduces the risk of material misstatement in the significant
account. All material portions of the population of leases should be subject to audit procedures.

After the team has completed its testing, it needs to revisit the risks associated with the lease liability
(i.e., E, C, M/V, P&D) and determine whether the extent of testing addresses these risks or whether
additional testing is necessary. As a reminder, MicroSTART can be used to select a representative sample
to test the existence and measurement/valuation assertions for assets and liabilities. Thus, additional
samples may not be necessary if the team concludes that these assertions have been appropriately
addressed by using the sampling approach described in the previous paragraphs. However, the team must
also assess whether the testing performed appropriately addresses the completeness assertion (i.e., the risk
of understatement of the lease liability). If the team is satisfied that it has performed sufficient procedures to
address the completeness of the lease population (refer to example procedures in section 3.4.1.1,
Assess the completeness of the population of leases), additional testing may not be necessary.
Teams also consider whether the extent of testing on the lease-related income statement accounts is
sufficient. Under the transition provisions of ASC 842, the pattern of expense recognition for existing
leases should not change, unless the entity has elected the hindsight practical expedient and it concludes
that the lease term has changed. If there is an effect on the income statement, teams will need to test
the activity in the lease-related income statement accounts. Because we will be testing the lease-related
income statement accounts in connection with the performance of our substantive audit procedures on
the related balance sheet accounts, the team should consider the evidence it has gathered through these
procedures. If the team determines that additional audit evidence is necessary to conclude that the lease-
related income statement accounts are free of material misstatement, the team will need to perform
additional audit procedures. To determine what additional testing is necessary, teams may use, where
appropriate, statistical sampling, judgmental sampling or the income statement sampling tables, keeping
in mind they should be taking credit for the work already performed to test the balance sheet accounts.
Refer to EY GAM SAMPLE 4.5 for further information.
Considerations when additional leases are identified in management’s assessment of completeness
When management has identified contracts that should have been accounted for as a lease under ASC 840,
we use attribute sampling (refer to the guidance in section 3.4.1.1, Assess the completeness of the population
of leases, for further information) to test whether the lease is appropriately classified under ASC 840. After
this testing, we follow the approach described above to determine the sample size to test the completeness
and accuracy of the lease data and the calculation of the transition adjustments for all leases on the Master
Lease Schedule. Teams need to keep in mind that it would not be appropriate to reduce the sample size for
testing the completeness and accuracy of the lease data and the calculation of the transition adjustments by
the sample of additional leases selected to test the lease classification.
3.4.3.1 Dual-purpose testing (updated July 2018)
Excerpt from PCAOB Auditing Standard 2315
AS 2315.44
In some circumstances, the auditor may design a sample that will be used for dual purposes: as a test of
control and as a substantive test. In general, an auditor planning to use a dual-purpose sample would have
made a preliminary assessment that there is an acceptably low risk that the rate of deviations from the
prescribed control in the population exceeds the tolerable rate. For example, an auditor designing a test of
a control over entries in the voucher register may design a related substantive test at a risk level that is
based on an expectation of reliance on the control. The size of a sample designed for dual purposes should
be the larger of the samples that would otherwise have been designed for the two separate purposes. In
evaluating such tests, deviations from the control that was tested and monetary misstatements should be
evaluated separately using the risk levels applicable for the respective purposes.

We consider performing certain of our implementation audit procedures using a dual-purpose testing
approach if this would be more efficient. When performing dual-purpose tests, we are mindful of the
guidance in EY GAM CONTROLS 5.2 Design the nature of tests of controls:
We may design our tests of controls to be performed concurrently with our tests of details
(substantive procedures) on the same transaction or item, known as a dual purpose test. We design
our dual purpose tests to achieve the purposes of both our:
• Tests of controls (i.e., to evaluate the operating effectiveness of the control to address the WCGWs)
• Tests of details (i.e., to identify and quantify the effect of material misstatements on the financial
statements)
A dual purpose test includes testing the control. Performing substantive procedures and inferring from
the results to conclude that controls are designed and operating effectively is not a dual purpose test.
Because the sample size used for dual-purpose testing is the larger of the samples that would otherwise have
been used for each individual test, the team will need to evaluate whether this is an efficient approach to follow.
During our audit of the implementation, teams may find it beneficial to use dual-purpose testing when testing
an attribute will result in similar sample sizes for our control and substantive testing. This may be the case
when we test the completeness of the population of leases. For example, when testing management’s
controls to evaluate whether a contract qualifies as a lease under ASC 840, we may select a sample size of
25 based on the guidance in EY GAM CONTROLS 5 Design tests of controls. If we perform a similar test for
our substantive audit because the objective of our procedure results in a binary “yes” or “no” conclusion
(i.e., whether a contract is or contains a lease), the team may select a sample of 25 vendor payments when
the population exceeds 250. In this situation, because both tests require the same sample size, it may be
more efficient to perform dual-purpose testing. For dual-purpose tests, we document clearly which attributes
and evidence relate to control testing and which relate to substantive testing.
While we may perform dual-purpose testing over contracts selected for controls testing, we may also
need to select contracts that were not included in our control testing sample as part of our substantive
testing procedures, depending on our risk assessment (including IPE risks).
3.5 Use of IT in the implementation and related data considerations

Many entities will consider implementing a new IT system, or modifying an existing one, to address the
implementation and prospective accounting under ASC 842. Entities need to be mindful of the risk that
software developed by others may not be fully functional in time for the adoption of ASC 842. As a
result, entities may not be able to implement IT systems that fully comply with the standard before the
effective date. In this case, some entities may determine that it is more cost effective and efficient to use
Excel to determine the transition adjustments and, perhaps, for the prospective accounting as well. It is
important to understand whether the use of IT in determining the transition adjustments will differ from
the use of IT for prospective accounting.
If management implements a new IT system or modifies an existing system to calculate the transition
adjustments, management needs to test that the system is functioning as intended and design controls
to address the risks of using the information it produces (see the discussion in section 2.3.4, Additional
risks arising from the use of IT in the implementation). Audit teams will need to evaluate the application
and/or IT-dependent controls in the SCOT that support the completeness and accuracy of the data
(required in an integrated audit) as well as the related ITGCs. We also need to test the completeness and
accuracy of any reports produced by the entity that are used to calculate the adjustments. Teams should
consider the guidance in our Audit Matters, System implementations can create new risks that we need to
address in our audits, when evaluating management’s controls and designing our substantive procedures.

Regardless of whether the entity implements a new system, modifies an existing one or uses Excel to
accumulate lease data and calculate the transition adjustments, management needs to design and
implement appropriate controls to address the completeness and accuracy of the data. Risks that could
affect the completeness and accuracy include:
• Data processed by the IT application from which reports are produced is not complete and accurate.
• Data extracted from the IT application into the reports is not the intended data or is not complete.
• User-entered parameters when requesting the reports are inappropriate.
• Computations or categorizations performed in the creation of the reports are inaccurate.
• The data output from the IT application to the end-user computing (EUC) tool is modified or lost in
transfer (if data is transferred to an EUC for analysis or reporting).
• Information added or changed (including computations and categorizations) using the EUC tool is
incomplete, inaccurate or inappropriate.
The risks related to the data and reports are heightened during the implementation because erroneous
data used in the implementation could lead to material misstatements of the ROU asset or lease liability.
If management uses Excel to calculate the transition adjustments, it needs to consider the relevant IPE
risks and implement controls related to the entry of data into the spreadsheet, the setup of the spreadsheet
to comply with ASC 842, and the modifications to formulas or data in the spreadsheet. Our audit procedures
need to address the same considerations.
For systems implemented to perform the prospective accounting, management needs to perform testing
during the transition period in order to make sure the system is functioning as designed on the effective
date. For example, if management has operating and finance leases, it needs to test whether the system
appropriately calculates the lease liability, the ROU asset and subsequent expense recognition patterns
for both types based on the requirements of ASC 842. The audit team’s testing of automated controls
needs to consider the entity’s leasing transactions and how the entity intends to use the IT system in
accounting for these transactions. If management is not able to complete its system implementation or
modification and related testing by the effective date, it needs to design additional controls that will
address the risks from the effective date until the time the testing can be completed.
Teams should involve our IT professionals throughout the audit to make sure we are appropriately
addressing the risks associated with the entity’s use of IT in implementing the new standard.
3.5.1 Addressing risks when management uses a service organization

(added July 2018)
When management uses a service organization to assist in the implementation or in the prospective
accounting, we consider the guidance in EY GAM SVC-ORG to assess management’s controls and design
our substantive procedures.
Management will need to identify controls that are responsive to the risks that arise from the implementation.
These controls may exist at a service organization or the entity may need to design controls to address
the risks. For example, if management uses lease accounting software that is provided by and hosted by
a third party (i.e., under a SaaS arrangement), the risks that must be addressed include those related to
implementing a new IT system, which were discussed in 2.3.4, Additional risks arising from the use of IT
in the implementation. Management will need to assess whether the controls at the service organization
address some or all of these risks in order to determine what testing it will need to perform over the
system implementation.

In another example, if management uses a third party to read contracts and evaluate the lease accounting
using an IT system, the entity will need to address the risks relating to the transfer of information or data
to the third party (e.g., the risk that all relevant contracts or information was not provided to the service
provider). In addition, if the third party will make any accounting judgments under ASC 842, the entity
will still need to address the risk that an incorrect accounting judgment is made (i.e., using a service
organization does not mitigate this risk).
Management may obtain a SOC 1 report related to the service organization’s processes and controls that
affect the entity’s internal controls. Management will need to make sure any risks not addressed by the
SOC 1 report are adequately mitigated by the entity’s own internal controls. In addition, management will
need to make sure that the period covered by the SOC 1 report supports its reliance on the service
organization. For example, if a service organization was engaged to calculate the transition adjustments,
the SOC 1 report will need to cover the period for which the entity relied on the service organization for
this purpose. In contrast, if management relies on the service organization to process its lease accounting,
the SOC 1 report will need to sufficiently cover the financial reporting period during which the service
organization was used.
If a service organization has not obtained a SOC 1 report or if the SOC 1 report does not address all of
the risks, management will need to determine how it will address the risks arising from the implementation.
That is, the entity may need to perform testing at the service organization. For SaaS arrangements, the
SOC 1 report will likely address ITGCs but may not address access controls at the entity or controls over
data entry and extraction. In addition, the SOC 1 report will typically not address application controls
over data processing (e.g., the calculation of the transition adjustments under ASC 842). In this case,
management will need to perform testing to obtain evidence about whether the system is functioning in
a manner that complies with ASC 842.
The audit team needs to understand how an entity’s use of a service organization affects the implementation
SCOT, including the processing of records and transfer of data, so that it can assess risks and design
control and substantive testing. As a reminder, teams may be able to rely on a SOC 1 report to support
the understanding of the processes performed by the service organization and the assessment of the
effectiveness of internal controls performed by the service organization. However, the audit team will
still need to perform substantive procedures to test the information processed by the service organization.
This testing may involve using evidence provided by the service organization. In addition, the audit team
will need to make sure the period covered by the SOC 1 report, along with the client’s controls and the
team’s additional procedures, where necessary, sufficiently cover the period for which the entity used
the service organization.
3.6 Prospective accounting policies (updated July 2018)

During implementation, entities will need to develop new policies, processes and controls to comply with
ASC 842 after adoption. The prospective policies, processes and controls need to address the accounting,
presentation and disclosure for leases that commence or are modified after the effective date. Management
needs to establish policies, processes and controls to address the risks of material misstatement under
ASC 842 when the entity (1) identifies a contract and determines whether it is or contains a lease,
(2) identifies and separates lease and non-lease components and allocates contract consideration,
(3) determines the lease term, including the commencement date of the lease, (4) determines lease
classification, (5) initially records and subsequently measures the lease, (6) evaluates lease modifications
and (7) determines the appropriate presentation and disclosures required for the leases.

Management’s prospective accounting policies, processes and controls will also need to address the
runoff of existing leases after the effective date. As a reminder, due to the unique transition provisions of
ASC 842, the accounting for certain leases that exist as of the effective date will include aspects of both
ASC 840 and ASC 842. For example, a lessee will continue to recognize lease expense (through the
amortization of the ROU asset and lease liability) consistent with its existing recognition pattern under
ASC 840 for the life of the lease unless certain events occur on or after the effective date that will
require modification or remeasurement under ASC 842. Management will need to make sure that the
new monitoring controls it implemented to identify reassessment events or lease modifications under
ASC 842 also identify events that would require the remeasurement of existing leases.
In an integrated audit, we need to test management’s entity-level controls over the development of the
new accounting policies, the approval of those policies and adherence to the policies. Teams need to
obtain contemporaneous evidence of the precision of the controls over the review and approval of the
new accounting policies.
From a substantive perspective, we evaluate management’s accounting policies and determine whether
we agree with its application of the guidance in ASC 842. We also evaluate whether the policy includes all
classes of underlying assets (e.g., real estate, vehicles, pipelines, computer equipment) and considers all
contractual terms that have an accounting consequence. The common risks and controls over the
prospective accounting for leases and the audit procedures we might perform to test those controls as
well as the substantive audit procedures we may perform are discussed in detail in the prospective guide.
We have observed that when developing prospective accounting policies, management frequently develops
accounting white papers that describe the application of the accounting framework for a contract or group
of contracts involving a class of underlying leased assets that become the basis for management’s policy.
Teams should consider leveraging their evaluation of contracts during implementation to form a basis for
our expectations of the entity’s new accounting policies (e.g., lease classification).
3.7 Extent of testing if the entity asserts it is not materially affected

Some companies may assert that the standard will have no material effect on their financial statements
or that they have few or no leases. In these situations, we will need to perform audit procedures to address
the risks that the entity (1) has not identified a complete population of contracts that are or may contain a
lease and (2) has not applied the requirements in the standard appropriately, including the disclosures. We
cannot rely on management’s assertion without performing testing of the accuracy of those assertions.
We would expect the entity to have established internal controls and completed documentation supporting
the procedures it performed to identify the complete population of contracts that are or may contain a
lease, even if the conclusion is that no contracts were identified.
Given the risk that the population of leases could be incomplete, which would result in an understatement
of the lease liability and ROU asset, we consider whether it would be appropriate to perform some or all
of the audit procedures outlined in this guide, including testing the controls put in place by management
during the implementation of the new leases standard. We may adjust the nature and extent of the
procedures we perform based on our risk assessment, our knowledge of the business and the understanding
we have obtained of the process used by management to corroborate the assertion that the entity is not
materially affected by the adoption of the standard.
SEC registrants need to make disclosures under SAB Topic 11.M about the anticipated effects of
adoption, even if the effect is not expected to be material. Refer to Appendix D, SAB Topic 11.M
disclosures, for our expectation of management’s controls and our responsibilities in this situation.

A Group audit considerations
A1 Overview
The Primary Team will need to consider how the adoption of the new leases standard affects its existing
group audit scoping strategy. This appendix was written from the perspective that the Primary Team has
already performed its scoping strategy. It highlights matters the Primary Team needs to consider to
determine whether more components should be in the scope of the group audit because of the risks
associated with the adoption of ASC 842. This is not a substitute for reading the guidance in EY GAM
GROUP SCOPE.
In a group audit, the Primary Team is responsible for developing an audit strategy that is responsive to
the risks of material misstatement of the group financial statements. The risks related to the
implementation of ASC 842 are summarized in section 2 of this guide and include the completeness of
the population of leases, the completeness and accuracy of the data used to apply the transition
provisions and the application of the ASC 842 transition provisions, including the disclosure requirements.
Many teams will be performing audit procedures related to the implementation in the period prior to the
adoption of ASC 842 (e.g., 2018 for a calendar-year entity that does not early adopt). If the Primary
Team requires a component to provide assistance to support its audit procedures over the
implementation, including the SAB Topic 11.M disclosures, that component would be considered in scope
in the period prior to adoption. Regardless of whether additional components were added to the group
audit scope in the year prior to adoption, the Primary Team will need to reassess the appropriateness of
its scoping of the implementation of ASC 842 in the year of adoption (e.g., 2019) to support the audit
opinion in the year that includes the transition adjustments.
To determine whether any modifications should be made to the group audit scoping strategy, the
Primary Team needs to consider the following:
• The organizational structure of the entity’s leasing activities
• Management’s process to implement ASC 842
• Whether a component is significant
• Not significant components
A2 Organizational structure of the entity’s lease activities

The Primary Team considers the extent to which the entity’s leasing activities (e.g., procurement,
accounting) are centralized or decentralized. Factors to help the Primary Team make this determination
include the following:
• How the entity negotiates and executes lease agreements (e.g., whether the entity has a central
procurement department that negotiates and executes lease agreements for all components within
the group)
• Whether a common IT application is used to track and account for leases across all components
• Whether the accounting and/or financial reporting processes for leases are performed at a central
location for all components

If the Primary Team concludes that the entity’s leasing activities are primarily centralized and the risks of
material misstatement associated with the implementation can be addressed by the Primary Team, it is
less likely that the Primary Team will need to modify its group scoping strategy.
A3 Management’s process to implement ASC 842

The Primary Team considers the entity’s implementation process to determine how that process may
affect the scope of the group audit. The Primary Team should consider:
• Whether a central team is responsible for implementing ASC 842, including establishing and
executing the controls that address the risks related to implementation such as surveying internal
stakeholders to identify leases and reviewing responses, analyzing vendor payments and collecting
the information used to determine that the data is complete and accurate
• The effectiveness of group-wide controls related to the implementation
• Consistency of the IT system application or end-user computing tool (e.g., Excel) used to track and
account for leases
• Whether the transition adjustments are calculated for all components at a central location
If the Primary Team concludes that the implementation is primarily being performed centrally and the
group-wide controls related to the implementation are effective, it is less likely that the Primary Team will
need to modify its group audit scoping strategy. However, the Primary Team would still need to consider
whether assistance from a component team is required to test the effectiveness of the group-wide controls.
If an entity’s leasing activities or the implementation process is decentralized, the Primary Team
considers whether more components should be in the scope of the group audit to address the risks
related to the implementation of ASC 842.
A4 Significance of the component

The Primary Team considers which components give rise to a risk of material misstatement of the group
financial statements because of the complexity or significance of the effect of the new standard at that
component. Implementation of the new leases standard is unlikely to result in additional components
considered significant based on size because the adoption is not expected to have a significant effect on
earnings-based measurements (e.g., pretax income or revenue) which are often used to determine the
relative size of components in the group. Furthermore, the addition of an ROU asset recorded at a
component is unlikely to result in the total assets of that component becoming significant to the group.
Accordingly, the analysis is likely to focus on risk rather than size.
Determining which components are significant based on risk is a matter of professional judgement.
Examples of factors for teams to consider to determine whether the component is significant based on
risk include the following:
• Whether the component has a large number of additional contracts such as service contracts or
other significant arrangements (e.g., multiple-element service arrangements (e.g., IT, telecom),
power purchase arrangements) that may be leases under ASC 840
• Whether the component’s operations are decentralized and require preparers to gather information
from many different sources
• Whether the component has a high level of leasing activity
• The level of oversight of the lease portfolio by the component

• Whether the leases are processed in a uniform manner
• Whether the lease accounting is maintained in an end-user computing tool (e.g., Excel)
• The effect of judgements used in the implementation (e.g., the number of leases where the effect of
the discount rate will be more significant (e.g., long-term leases))
• Whether material issues (e.g., fraud risks), misstatements or control deficiencies have been reported
in the past
• The use of multiple IT systems
• Whether the component was recently acquired and management is therefore unfamiliar with the
component’s leasing activities and its controls
A5 Not significant components

Once the Primary Team determines the components that are significant, the Primary Team uses its
professional judgment to determine whether the components that are not significant components can,
individually or in the aggregate, give rise to a material misstatement of the group financial statements.
There are no prescribed percentages of coverage over the group’s significant accounts or components
that the Primary Team may rely on to determine whether not significant components should be in the
scope of the audit. Our audit objective is to perform testing at a sufficient number of not significant
components to conclude that the remaining portion of the accounts that are affected by the transition
adjustments have a risk of material misstatement that is at an acceptably low level at the group level. Our
group scoping methodology does not require scoping the audit on an account-by-account level, such as
the ROU asset.
However, if the ROU asset and related lease liability have a higher level of risk of material misstatement, the
amount of evidence needed from additional in-scope components to be selected depends on (1) the
sufficiency and appropriateness of the audit evidence obtained for the significant components and (2) the
group organization, including group-wide controls. For example, the Primary Team would consider the
extent that the ROU asset and related lease liability (i.e., if the ROU asset and related lease liability contain
a higher level of risk of material misstatement) are represented by components that are significant and the
extent of evidence needed from the not significant components. If the ROU asset and related lease liability
or extent of lease activity represented by significant components is small relative to the group, the Primary
Team may need to include not significant components in the scope.
As part of its determination, the Primary Team also considers the nature and precision of the group-wide
controls over the lease implementation process. We expect that components that are not significant will
be subject to the testing of group-wide controls if the Primary Team performs an integrated audit or uses
a controls reliance strategy. If group-wide controls are not robust or tested, the Primary Team may have to
perform more extensive substantive testing over the implementation at more not significant components.
A6 Extent of work to be performed at in-scope components

For those additional components scoped in because of the leases implementation, the Primary Team will
assign either a full scope or a specific scope or request the component team to perform specified
procedures. The final determination will be based on the specific facts and circumstances, but we expect
most Primary Teams to assign a specified procedures scope.

A7 Oversight of component teams (added July 2018)
Audit teams need to assess whether component teams have a sufficient understanding of the new leases
standard to be able to effectively perform the procedures assigned to them. This is especially true of
component teams in foreign locations because there are certain differences between ASC 842 and IFRS
16, Leases, including differences in the transition provisions.
The Primary Team should use professional judgment to determine whether the component team needs
to complete additional training beyond EY’s standard requirements for foreign audit personnel.
Additional training is likely necessary when the Primary Team assigns procedures to the component team
that require an in-depth understanding of the new leases standard. The Primary Team may consider it
appropriate to require the component team to complete some or all of the lease-specific accounting and
auditing training that is required for US professionals. This training can be found on the Lease
Accounting Discover page.

B Lessor auditing considerations
B1 Introduction (updated July 2018)

This appendix discusses key considerations in auditing a lessor’s transition to ASC 842. If a lessor elects
the package of practical expedients and does not elect the hindsight practical expedient, adopting the
new leases standard may be relatively straightforward. In this case, most lessors will not need to
calculate any transition adjustments, and audit teams generally will not need to change their assessment
of SCOTs, significant accounts or CRAs. However, lessors need to keep in mind that there may be
changes related to presentation and disclosure beginning in the quarter of adoption. Also, the election of
the package of practical expedients does not grandfather incorrect conclusions under ASC 840. As such,
additional effort may be required during implementation if existing policies, processes and controls are
not adequate to gather and monitor information needed to meet the requirements of the new standard.
Like lessees, many lessors are expected to elect the package of transition practical expedients, and this
Appendix was developed based on this assumption. The implementation risks when a lessor elects the
package of practical expedients include those related to the completeness of the population of leases, the
election of the hindsight practical expedient and the entity’s SAB Topic 11.M disclosures about the
anticipated effects of adopting the new standard.
In addition, if the FASB finalizes the proposed practical expedient to allow lessors to combine certain
lease and related non-lease components and a lessor elects this expedient, it will need to address the
risks relating to the application of this practical expedient (see section B1.1, Transition for lessors, for
further information).
This Appendix discusses these risks and includes example controls and substantive procedures we may
perform to address these risks.
This Appendix also highlights the importance of evaluating the prospective accounting policies, processes and
controls that an entity develops during the transition period so that we are prepared to perform a quarterly
review in the quarter of adoption. This evaluation will also help us audit the SAB Topic 11.M disclosures.
that do not elect the package of practical expedients, particularly when contracts no longer qualify as
leases or the lease classification changes for existing leases. Members of the Quality Network are available
to assist teams on audits of entities that choose not to apply the package of practical expedients.
Leases audit roadmap

The graphic below shows our expectations for the implementation timeline for a calendar year-end public
company that does not early adopt, and activities for auditing the implementation and the first-year of
adoption. The steps in the leases audit roadmap should be completed by all teams.
Auditing the implementation Auditing the prospective period

1
To be completed by June 2018 November 2018 Year end 2018 Quarter of adoption (Q1 2019) Year of adoption (2019)
2. Identify risks 3. Develop 6. Update risk assessment, 7. Update

1. Obtain preliminary 4. Evaluate design 5. Perform control and substantive understanding 8. Perform audit procedures and evaluate
of material
understanding audit strategy and test controls substantive testing testing related of prospective new disclosures (Q1 and YE)
misstatement to implementation SCOT

Please keep in mind that the steps of the roadmap align with EY GAM, but audit teams may not perform
the steps in the order listed, and the steps may be iterative in nature. The extent of documentation
necessary in each step will depend on the entity’s facts and circumstances and the effects of the
adoption of ASC 842.
B1.1 Transition for lessors (updated July 2018)

Section 1.3, Summary of effective dates and transition, provides a summary of the effective dates and
transition provisions of ASC 842, which apply to both lessors and lessees. 18 Teams should refer to this
section for more information.
In addition, section 1.4, Transition practical expedients and other policy elections affecting transition,
provides guidance on the following transition practical expedients to assist entities with implementation:
• The package of practical expedients
• The hindsight practical expedient
• Easements practical expedient
These practical expedients apply to both lessors and lessees. Therefore, teams should consider the effect
of applying (or not applying) the practical expedients to all contracts, including those where the entity is
the lessee. Teams should refer to this section for more information.
Proposed practical expedient to not separate lease and non-lease components
The FASB proposed amending ASC 842 to add a practical expedient that would allow lessors to elect (by
class of underlying asset) to not separate lease and related non-lease components if both of the following
criteria are met:
• The timing and pattern of transfer of the lease component and the associated non-lease
component(s) are the same.
• The lease component would be classified as an operating lease if it were accounted for separately.
If this proposed practical expedient is finalized and a lessor elects to apply it after determining that the
criteria are met, the lessor would be required to account for the combined component as a single
performance obligation in accordance with ASC 606 if the non-lease component is the predominant
component. If the non-lease component is not the predominant component, a lessor would be required to
account for the combined component as an operating lease in accordance with ASC 842. The lessor
would have to apply the practical expedient to existing contracts as of the date of initial application.
This Appendix will be updated to provide additional audit guidance when the proposed amendment is
finalized.
Transition accounting considerations
The FASB indicated in the Basis for Conclusions (BC 390) that the practical effect of the modified
retrospective transition is that an entity “runs off” its accounting for certain leases that existed before
the effective date when lease classification does not change in transition (which is an effect of electing
the package of practical expedients).
18
Refer to sections 11.1 and 11.2 of our ASC 842 FRD for detailed information on the transition provisions and practical
expedients.

When the package of practical expedients is elected, lessors with direct financing and sales-type leases
will continue to recognize a net investment in the lease at the later of the date of initial application or the
commencement date of the lease, measured at the carrying amount of the net investment in the lease
under ASC 840. For direct financing leases, the net investment upon adoption will include any
unamortized initial direct costs capitalized in accordance with ASC 840. For operating leases, the
carrying amounts of the underlying asset and any lease assets or liabilities (e.g., prepaid or accrued
rent) are the same as those recognized under ASC 840. For all lease types, the lessor recognizes
income consistent with its existing recognition pattern under ASC 840 for the life of the lease, unless
certain events occur that trigger a modification or remeasurement of the lease under ASC 842 on or
after the effective date.19 Refer to section B3.2, Address risks when the hindsight practical expedient is
elected, for a discussion of the effect of applying the hindsight practical expedient.
B1.2 Effect of the implementation on our audit approach and planning

Based the transition provisions in ASC 842 discussed above, we likely will not change our assessments of
significant accounts, SCOTs, or our CRAs for leases when designing our audit of the implementation but
teams need to make this determination based on the facts and circumstances.
B2 Understand management’s process for implementing ASC 842

We obtain and document our understanding of management’s process for implementing ASC 842. As
part of this understanding, we need to obtain an understanding of the entity-level controls relating to the
entity’s adoption of ASC 842. Teams should refer to sections 2.2, Understand entity-level controls, and
2.2.1, Example entity-level controls for each COSO 2013 Framework principle, for further information.
We should critically assess management’s overall project plan and timeline and consider whether the
entity has sufficient and competent resources to complete the implementation, including the evaluation
of the effect of ASC 842 on prospective accounting, presentation and disclosures. As we assess
management’s timeline, we need to be mindful that management will also need to develop policies,
processes and controls to be ready to account for new and modified contracts on or after the effective
date. Management’s timeline needs to allow adequate time for the preparation and review of these
policies, including the audit team’s evaluation.
B3 Assess risks, plan and execute our audit

As indicated above, the implementation risks relate to the completeness of the population of leases, the
election of the hindsight practical expedient and the entity’s SAB Topic 11.M disclosures about the
anticipated effects of adopting the new standard. If we are performing an integrated audit or using a
controls reliance strategy, we need to test the operating effectiveness of management’s controls to
address these risks. Our substantive audit procedures are also designed to respond to the risks. In
addition, our audit procedures need to consider our evaluation of management’s policies, processes and
controls for implementing ASC 842 and for the prospective accounting under ASC 842.
Entities and audit teams also need to consider the expanded disclosure requirements of ASC 842. In
order to prepare for these disclosures, management needs to perform a gap analysis between the
current disclosure requirements and those under the new standard and determine the additional
information that will be needed and that can be gathered during the implementation.
19
Refer to section 11.4 of our ASC 842 FRD for discussion of the lessor transition considerations.

As part of our substantive procedures during the implementation, we need to understand management’s
gap analysis and its plan for prospective disclosures. This may include reading draft disclosures prepared
by management or reviewing schedules prepared to support future disclosures as part of our procedures
over the completeness and accuracy of lease data.
In planning our audit, teams should consider whether any entity-specific or lease-specific inherent risk
factors rise to the level of a significant risk or fraud risk (refer to example factors in section 1.6, Effect of
implementation on our audit approach and planning). However, if the entity elects the package of
practical expedients, we do not expect teams to identify additional significant risks or fraud risks as a
result of the implementation because the accounting requirements during the implementation are similar
to current accounting under ASC 840.
Refer to section 3.3, Reminders regarding the timing of our audit procedures over the transition adjustments
and workpaper archiving, for reminders about the workpapers that should be included in the 2018 and 2019
EY Canvas files.
Our considerations with respect to determining PM and TE for our audit of a lessor’s implementation of
ASC 842 are the same as those discussed for audits of lessees in section 3.2, Planning materiality and
tolerable error considerations.
Team events
Teams on audits of public entities will need to complete two team events during the transition period that are
designed to encourage meaningful discussion among members of the team at all levels and any EY specialists
involved in our audit of the implementation.
Teams auditing calendar-year entities are expected to complete Leases Team Event 1 by 30 June 2018.
Teams will discuss their understanding of the entity’s leasing activities, their initial evaluation of the effect
of the new standard and the entity’s implementation plan for ASC 842. Based on this discussion, teams will
identify the risks relating to the implementation, develop an expectation of the relevant controls and
develop a preliminary audit strategy. Teams on audits of entities that are solely lessors should plan for this
team event to last approximately one to two hours. The Team Event 1 preparation checklist includes a
series of questions that teams can ask management to prepare for Team Event 1, among other things.
Teams auditing calendar-year entities are expected to complete Leases Team Event 2 by 30 November
2018. This event is designed to assist audit teams in reviewing the results of our evaluation of the design
and operating effectiveness of implementation controls, reassessing the risks identified in Leases Team
Event 1 or any new risks, and evaluating our plan for substantive testing based on these assessments.
B3.1 Assess the completeness of the population of leases

Due to some changes to lessor accounting (i.e., new required presentation and disclosure), entities need
to make sure they have identified all leases, including embedded leases, before the first reporting date
under ASC 842 (i.e., 31 March 2019 for a calendar-year public entity that does not early adopt).
Management needs to reconsider whether the entity’s existing controls are sufficiently precise to identify
all leases under ASC 840. For example, an entity may not have had robust processes in place to identify
service contracts that contain operating leases because the accounting treatment for operating leases
under ASC 840 and service contracts is similar. In this case, the entity may need to design new controls
to determine whether these contracts are leases or contain leases under ASC 840.

The following table provides an example WCGW and example controls and substantive procedures to
address this risk. Our expectations of management’s controls and our planned substantive procedures
are responsive to the entity’s risks.
WCGW Example controls1 Example substantive procedures1

• The entity has not • Management inquires of internal • Perform inquiries of internal
identified all stakeholders (e.g., legal, finance, stakeholders (e.g., legal, finance,
arrangements that operations, procurement) to identify operations, procurement) to identify
are or contain a contracts that may be leases or may contracts that may be leases or may
lease under contain leases. The controller reviews the contain leases.
ASC 840. (C) results of the inquiries to determine
whether any contracts not previously
considered may contain a lease and
selects a sample of contracts to review.
The controller determines whether
additional follow-up is needed to conclude
that the population of leases is complete.
• The controller reviews an analysis • Select a sample of service contracts to
prepared by the senior accountant of determine whether the contracts are
service contracts not previously identified leases or contain a lease under ASC 840.
as being leases or containing leases to Determine that the contracts were
determine whether the contract or part appropriately included in or excluded
of the contract meets the definition of a from the population of leases.
lease under ASC 840. The controller
determines whether the contracts have
been appropriately included in or
excluded from the lease population.
_________________________________
1
Attribute testing
When the objective of our procedures to test the completeness of the lease population results in a binary
“yes” or “no” conclusion (e.g., whether a contract is a lease or contains a lease), we believe that attribute
sampling is appropriate. However, when the objective of our procedures does not result in a binary “yes” or
“no” conclusion, attribute sampling is not appropriate. Attribute sampling generally results in a sample of 25
for populations larger than 250 items. Refer to EY GAM SAMPLE 2.3.4 and 4.5.3c for further information.
B3.2 Address risks when the hindsight practical expedient is elected

When an entity elects to apply the hindsight practical expedient, management considers all facts and
circumstances that have changed, through the effective date, in determining the lease term. If applying
the hindsight practical expedient results in the conclusion that the lease term should change, the entity
adjusts its income prospectively (i.e., from the later of the date of initial application or the commencement
date of the lease). For sales-type or direct financing leases, the entity also adjusts the carrying amount of
the initial measurement of the net investment in the lease measured under ASC 840 for the change in
the lease term to reflect how the lease would have been recorded under ASC 840 had the revised lease
term always been used. For operating leases, the carrying amount of any lease assets or liabilities
(e.g., prepared or accrued rent) are adjusted to account for the revised lease term.

The following table provides the example WCGW and related example control and substantive procedures
to address this risk. Our expectations of management’s controls and our planned substantive procedures
are responsive to the entity’s risks.
WCGW Example control1 Example substantive procedures1

• The entity elects • For each lease, the senior accountant • Obtain management’s calculation of the
to apply the assesses whether the use of hindsight revised lease term and supporting
hindsight practical would change the lease term. For a documentation and analyses for the
expedient but sample of leases, the controller reviews entity’s population of leases. For a
does not the assessment of the lease term to sample of leases, determine whether the
appropriately determine that the judgments made for revised lease term is appropriate
reassess the lease individual leases have appropriate considering the facts and circumstances
term based on all support and comply with the identified by management.
facts and requirements of ASC 842. For the • Based on our knowledge of the entity or
circumstances sampled leases, the controller reviews information obtained from other audit
through the the preparer’s assessment of facts and procedures, determine whether there
effective date. circumstances through the effective are other events that occurred prior to
(M/V, P/D) date and reperforms the calculation of the effective date that should be
the effect of any change in lease term to considered in the determination of the
the lease-related assets and liabilities lease term.
and lease income. Follow-up is
• Based on the revised lease term,
performed for differences identified
determine that the lease-related assets
during the review until such differences
and liabilities and lease income were
are resolved.
properly adjusted.
_________________________________
1
We may consider performing dual-purpose testing, when appropriate. Reminders from EY GAM about how to use approach are
discussed further in section 3.4.3.1, Dual-purpose testing.
Other considerations when an entity elects the hindsight practical expedient

When an entity has elected the hindsight practical expedient, teams should consider the additional time
that may be needed to reassess the lease term for each contract and make sure that management has
provided for adequate time in its project plan. We would expect management to start work on implementation
earlier in the transition period when there are a significant number of existing lease contracts.
Given the additional effort that is expected from management if an entity elects the hindsight practical
expedient, teams will likely identify an implementation SCOT. As a reminder, teams on integrated audits
should use Project Insight to document their understanding of this SCOT and the design of controls.
B3.3 Evaluate management’s SAB Topic 11.M disclosures

Entities that are SEC registrants need to comply with SAB Topic 11.M, which requires disclosure of the
anticipated effects of new accounting standards if the effects are known. As with any other disclosure, a
registrant must design controls to assess the completeness, accuracy and adequacy of these disclosures.
The SEC staff has monitored registrants’ disclosures about the effect of adopting recently issued
accounting standards (e.g., ASC 606) and, in some cases, is requesting expanded disclosures. We expect
the SEC staff to focus on registrants’ disclosures about the new leases standard in their filings prior to
the effective date.
The following WCGW relates to the SAB Topic 11.M disclosures management must make in the transition
period:

The internal controls that are in place to support an entity’s SAB Topic 11.M disclosures may include
some or all of the following, depending on the status of the entity’s implementation effort and the nature
of the disclosure:
• Controls over the contract reviews performed by management to determine the effect of ASC 842
on the entity’s existing lease portfolio and typical leasing transactions
• Controls over the application and disclosure of elected practical expedients
• Controls over the development and approval of the implementation and prospective accounting
policies (refer to discussion of our expectations of the prospective accounting policies in section B4,
Considerations related to prospective accounting policies, processes and controls).
We will need to perform substantive testing over the entity’s SAB Topic 11.M disclosures, even if the
disclosure says that there is no material effect.
Refer to Appendix D, SAB Topic 11.M disclosures, for further discussion of the audit considerations for
SAB Topic 11.M disclosures.
B4 Considerations related to prospective accounting policies, processes and

controls
During implementation, entities will need to develop new policies, processes and controls to comply with
ASC 842 after adoption. The prospective policies, processes and controls need to address the accounting,
presentation and disclosure for the leases that commence or are modified after the effective date. Management
needs to establish policies, processes and controls to address the risks of material misstatement under ASC 842
when the entity (1) identifies a contract and determines whether it is or contains a lease, (2) identifies and
separates lease and non-lease components and allocates contract consideration, (3) determines the lease
term, including the commencement date of the lease, (4) determines lease classification, (5) initially records
and subsequently measures the lease, (6) evaluates lease modifications and (7) determines the appropriate
presentation and disclosures required for the leases.
In an integrated audit, we need to test management’s entity-level controls over the development of the
new accounting policies, approval of those policies and adherence to the policies. Teams need to obtain
contemporaneous evidence of the precision of the controls over the review and approval of the new
accounting policies.
From a substantive perspective, we evaluate management’s accounting policies and determine whether
we agree with its application of the guidance in ASC 842. We also evaluate whether the policies include
all classes of underlying assets (e.g., real estate, vehicles, pipelines, computer equipment) and consider
all contractual terms that have an accounting consequence. The common risks and controls over the
prospective accounting for leases and the audit procedures we might perform to test those controls as
well as the substantive audit procedures we may perform are discussed in detail in the prospective guide.
We have observed that when developing prospective accounting policies, management frequently
develops accounting white papers that describe the application of the accounting framework for a
contract or group of contracts involving a class of underlying leased assets that become the basis for
management’s policy.
IT considerations in the prospective period

Lessor entities are more likely to have an accounting system in place to track lease income if leasing is
core to the lessor’s operations. However, management may need to modify its existing IT system, or
implement a new system, in order to comply with the requirements of ASC 842.

If management implements a new IT system or modifies an existing system to perform the prospective
accounting, management needs to perform testing during the transition period in order to make sure the
system is functioning as designed on the effective date. For example, if the entity has operating leases,
management needs to test whether the system appropriately calculates the lease assets and liabilities
and income recognition patterns based on the requirements of ASC 842. The audit team’s testing of
automated controls needs to consider the entity’s leasing transactions and how the entity intends to use
the IT system in accounting for these transactions.
Audit teams should read the Audit Matters, System implementations can create new risks that we need to
address in our audits, issued on 17 October 2017, which discusses in more detail the risks that exist when
an entity implements new systems. Teams should also involve our IT professionals to make sure we are
appropriately addressing the risks associated with the entity’s use of IT.

C Use of the GDS Accounting Change
COE in auditing the implementation
of ASC 842
C1 Overview of the COE

The Accounting Change Center of Excellence (COE) is part of Global Delivery Services (GDS) and comprises
experienced audit professionals and FAAS professionals who have experience helping Channel 2 clients
implement ASC 842. Since it was established last year to help teams implement ASC 606, the COE has
helped more than 200 audit teams.
Due to the complexity of the new leases standard, auditing an entity’s implementation of ASC 842 may
require significant effort. Leveraging COE resources will help us complete our work in a timely manner.
Some of the key benefits of using the COE are:
• The COE delivers a high-quality work product due to the detailed review performed by a COE
manager or above prior to delivery of the work to the audit team.
• Having the COE perform work can free up audit team resources for more subjective and complex
areas of the audit.
• Using the COE allows us to take advantage of GDS’s favorable cost structure. That is, the GDS rate
structure also applies to COE work.
Nature of the work that may be performed by the COE

The COE may perform only objective audit procedures (i.e., those procedures that require little to no
judgment to execute and perform). Objective procedures may include certain tests of controls or
substantive procedures.
We cannot assign “subjective” audit procedures to the COE. Performing subjective audit procedures
requires the ability to exercise professional judgment, apply professional skepticism, consider fraud risks
and identify matters and results that indicate potential fraud.
When determining the objective procedures to assign to the COE, we consider the CRA of the relevant
assertions, the extent of interaction with entity personnel required to perform the procedures, the level
of supervision needed and any relevant entity-specific facts and circumstances.
Our US Assurance Policy Manual (US APM) 1.12, Using the Global Talent Hub on our audits, describes
our policy in more detail.

C2 Integration with the COE
Audit planning
Timely and effective communication is critical to the success of working with the COE. Audit teams
should plan for COE involvement from the initial planning stages of the implementation. Some of the
important matters to be considered by the audit team during the planning phase include the following:
• Engage with the COE early in the process to understand how the COE can assist in the audit
• Include COE team members in Leases Team Events 1 and 2 and other relevant team meetings (at a
minimum, the COE team members should be involved in discussions about the background of the
audit, the strategy to audit the entity’s implementation of ASC 842 and the areas where the COE
team members will work)
• Establish budgets and the timing of the deliverables
• Identify specific COE team members to be involved
As the COE team members and the audit team execute procedures, it will be critical that the audit team
and the COE:
• Communicate changes in timelines so staffing adjustments can be made as soon as possible
• Set up regular periodic touch points to discuss the status of the work and provide real-time feedback
about the quality of the work product from the COE
Procedures the COE may perform on an audit of an entity’s implementation of ASC 842
For each step of the roadmap, we include example procedures that the COE may perform. It is the
responsibility of the audit team to determine that the nature of these or any other procedures is
objective and consistent with the principles in US APM 1.12.
Step 1 of the roadmap: Obtain understanding

• Compare the entity’s project timeline to the leases benchmark timeline that can be found on the AC
supplemental topics page in EY Atlas. Identify and communicate activities that do not meet our
baseline expectation of when the activity should be completed.
• Use the information provided by the audit team to draft preliminary documentation of our
understanding of the critical path of the implementation SCOT.
• Attend Leases Team Event 1 and record minutes.
Step 2 of the roadmap: Identify risks of material misstatement

• Update the preliminary documentation of our understanding of the critical path of the
implementation SCOT.
• Compare the entity’s risks and controls to the example risk and control matrix (RCM) in Appendix F,
Example risk and control matrix for lessees. Identify and communicate any differences in the risks or
controls to the audit team.
• Draft Part A of Form 276US Leases (ASC 842) implementation audit form and/or other related
documentation.

Step 3 of the roadmap: Develop preliminary audit strategy
• Update EY Canvas to reflect our audit plan based on the discussion at Leases Team Event 1
(e.g., identified risks and controls, and our strategy for testing controls and performing substantive
procedures).
• Draft Part A of Form 276US and/or other related documentation.
• Draft a client assistance list for our audit of the implementation of ASC 842.
Step 4 of the roadmap: Evaluate design and test controls

• Attend Leases Team Event 2 and record minutes of the meeting.
• Update the documentation of our understanding of the critical path of the implementation SCOT.
• Confirm changes in strategy discussed in Leases Team Event 2 with the audit team and update Part A
of Form 276US to reflect these changes.
• Update EY Canvas to reflect any change in the audit plan (e.g., changes to strategy for testing
controls, changes to our strategy for performing substantive procedures).
• Test the operating effectiveness of certain control attributes (e.g., attributes for key controls that
are tested by inspection of documents, observation or reperformance).
• Update the Summary of control deficiencies for identified exceptions where appropriate.
• Draft Part B of Form 276US and/or other related documentation.
Step 5 of the roadmap: Perform substantive testing

Completeness of the population of leases
• Reconcile the Master Lease Schedule to the information in the workpapers that the audit team used
to test the lease disclosures in the prior-year financial statements and highlight any differences for
further investigation by the audit team.
• Compile responses to a survey of internal stakeholders (e.g., legal, finance, operations,

procurement). Highlight matters for further investigation (e.g., locations that have not responded,
possible unidentified leases) by the audit team.
• For a sample of vendor payments, review the underlying contract and document the key terms and
conditions to help the audit team evaluate whether the contract is or contains a lease that is not
included on the Master Lease Schedule.
• For a sample of active vendors, review the underlying contract and document the key terms and
conditions to help the audit team evaluate whether the contract is or contains a lease that is not
included on the Master Lease Schedule.
• Assist the team in coordinating independent confirmations of the entity’s significant leasing
relationships. Prepare a summary of the responses and highlight differences between the
confirmation and the Master Lease Schedule for further investigation by the audit team.
• For additional contracts identified, review the underlying contract and document the key contract
terms to help the audit team evaluate whether the contract is or contains a lease under ASC 840
and, if so, whether it is classified appropriately.

Completeness and accuracy of the lease data
• For a sample of contracts, compare the data in the Master Lease Schedule (e.g., the remaining lease
term, the remaining minimum rental payments) to the original contract (or modified contract, if
applicable) or other data source.
Transition adjustments and disclosures
• Assist the audit team in testing the calculation of the transition adjustments by:
• Agreeing the information in the Master Lease Schedule (e.g., remaining lease term, remaining
minimum rental payments) to the information used in the calculation and highlighting any differences
• Agreeing the total ROU asset and lease liability for operating and finance leases to the amounts
recorded in the balance sheet and highlighting any differences
• Checking the mathematical accuracy of the calculations.
Additional risks arising from the use of IT in the implementation
• Assist the audit team in testing how the IPE risks have been addressed. The following are some
examples of objective procedures that the COE can execute. This list is not meant to be all-inclusive,
and is not a substitute for reading EY GAM IPE or our Call to action: Addressing the risks of
information produced by the entity:
• Agree items on the IPE to source documents and agree source documents to items on the IPE,
and communicate any differences to the audit team (IPE risks 1, 2(i), 2(ii), 3, 4 and 5).
• Inspect a screenshot of the parameters input by the management user when preparing the IPE.
Based on direction from the audit team, assess if the parameters are appropriate (IPE risk 2(ii)).
• Agree the totals of amounts in each column of the IPE in the EUC tool (Excel) to an on-screen or
non-modifiable version of the IPE (IPE risks 4 and 5).
• Agree a sample of items of the IPE in the EUC tool (Excel) to an on-screen or non-modifiable
version of the IPE (IPE risks 4 and 5).
• Test the clerical accuracy of the IPE (IPE risk 5).
Step 6 of the roadmap: Update risk assessment, control and substantive testing related to
implementation
• Update the documentation in EY Canvas to reflect updates to the audit team’s risk assessments,
control testing and substantive testing, as applicable.
• Compare the entity’s final risks and controls to the example RCM in Appendix F. Identify and
communicate any differences in the risks or controls to the audit team.
• Assist the audit team in testing the calculation of the final transition adjustments, if necessary
(see Step 5 for example procedures).

Step 7 of the roadmap: Update understanding of prospective SCOT
• Use the information provided by the audit team to draft documentation of significant changes in ICFR
resulting from the adoption, including relevant IT applications.
• Compare the entity’s risks and controls for prospective accounting to the example RCM in our
prospective guide. Identify and communicate any differences in the risks or controls to the audit team.
Step 8 of the roadmap: Perform audit procedures and review new disclosures (Q1 and YE)
• Draft the preliminary documentation of our understanding of the critical path of the prospective SCOT.
• Test the operating effectiveness of certain control attributes.
• Review new or modified contracts and input key contract terms in the Contract analysis tool for
leases to help the audit team evaluate the entity’s policies and processes for its prospective accounting,
including whether the contract is or contains a lease under ASC 842 and lease classification.
• Assist the audit team in testing the five IPE risks (see Step 5 for example procedures).
• Assist the audit team in completing the questions related to ASC 842 in Form A13 GAAP disclosure
checklist.

D SAB Topic 11.M disclosures
D1 Requirements of SAB Topic 11.M and SEC comment trends

SEC registrants need to comply with SAB Topic 11.M, which requires disclosure of the anticipated effects of
recently issued accounting standards. As with any other disclosure, a registrant must design controls to
assess the completeness, accuracy and adequacy of these disclosures. Click here for the full text of SAB
Topic 11.M.
Registrants should also consider disclosing whether they plan to apply the transition practical expedients
available in the new leases standard, which transition method they plan to elect and other significant
matters that might result from adopting the new standard (e.g., planned or intended changes in business
practices, effect on debt covenants).
The SEC staff has monitored registrants’ disclosures about the new revenue recognition standard and is
likely to focus on registrants’ disclosures related to the new leases standard. Registrants should also be
aware that the SEC staff expects these disclosures to become more specific each quarter. The SEC staff
may raise questions if registrants continue to provide high-level disclosures.
If a registrant includes amounts in the audited financial statements, those amount most be audited and
cannot be labeled unaudited.
Refer to section 11.1.1 of our ASC 842 FRD for further discussion of the requirements of SAB Topic 11.M
as they pertain to the new leases standard.
D2 Audit responsibilities — controls and substantive

We need to test a registrant’s controls over its SAB Topic 11.M disclosures for integrated audits or when
we use a controls reliance strategy. Additionally, we need to substantively evaluate the appropriateness
of the disclosures, which may include testing quantitative ranges or the registrant’s assertion that there is
no material effect. In general, the nature and extent of our procedures depends on the nature and
specificity of the registrant’s disclosures and our risk assessment for the disclosures. In all cases, we
should evaluate whether the registrant’s disclosures accurately reflect the status of its implementation
and comply with the requirements of SAB Topic 11.M.
Our testing of the registrant’s implementation of the new standard (e.g., testing the completeness of the
lease population) should provide us with evidence to support the registrant’s SAB Topic 11.M disclosures.
As part of this testing, we should obtain the registrant’s analysis and related support. Our control testing
and substantive procedures over the disclosures relate to our audit opinion in the year the disclosures
are made (i.e., prior to adoption), and therefore the related documentation should be retained in that
year’s workpapers. Furthermore, we use TE related to the year the disclosures are made to perform our
testing and assess errors.
We generally expect registrants to provide one of four types of disclosures about the effect of the new
standard: (1) a statement that the registrant is still evaluating the effect, (2) qualitative disclosures,
(3) the quantitative effect or (4) a statement that there will be no material effect.

The following table provides some audit considerations related to each of these disclosure types:
Disclosure of the effect Audit considerations

Still evaluating If a registrant makes this type of disclosure together with certain qualitative
disclosures of the effect (e.g., a description of the new standard’s effect on
its accounting policies), we need to consider the matters discussed in the
qualitative disclosures section below.
We would expect it to be rare for registrants to disclose that they are still
evaluating the effect in the filing that immediately precedes adoption. If this
were to occur, we would consider whether to communicate any concerns
about implementation challenges to the audit committee pursuant to
PCAOB AS 1301, Communications with Audit Committees, paragraph 13.f.
We would also consider whether these concerns indicate that a deficiency
exists in the registrant’s entity-level controls, including its control
environment and risk assessment processes.
Qualitative disclosures — Controls
This type of disclosure For integrated audits or when we use a controls reliance strategy, we should
generally includes a understand management’s process and the related controls for developing
discussion of the the disclosures. A registrant’s controls will need to support compliance with
significant leasing the requirements of SAB Topic 11.M and the accuracy of the status of the
activities, a description registrant’s implementation. They also need to adequately describe the new
of the new standard’s standard’s effect on the registrant’s accounting policies with a comparison
effect on the registrant’s to its current accounting policies. In order to support these objectives, the
accounting policies with registrant would typically have controls that address some combination of:
a comparison to its • The completeness of the lease population
current accounting
• The review of lease contracts and identification of contractual terms
policies, and a discussion
and conditions that could result in an accounting change between
of whether the optional
ASC 840 and ASC 842
practical expedients will
be applied. • The selection of accounting policies for the implementation of ASC 842
and preliminary prospective accounting policies, including any practical
expedients elected
We need to evaluate whether the relevant controls are designed appropriately
to support the specific disclosures made, and we need to test the operating
effectiveness of the controls. The extent of our testing will depend on the
design of the controls and the risks they are intended to address.
Substantive
We need to evaluate whether the disclosures (1) comply with the requirements
of SAB Topic 11.M, (2) accurately reflect the status of the registrant’s
implementation and (3) adequately describe the new standard’s effect on the
registrant’s accounting policies. To support our evaluation of the disclosures,
our substantive testing may need to include some combination of testing the
completeness of the lease population, reviewing lease contracts and
evaluating the registrant’s selection of its preliminary accounting policies.
The nature and extent of our substantive testing will depend on the
specificity of the disclosures provided by management and our risk
assessment for the disclosures. For example, we may need to inspect a
sample of a registrant’s lease contracts to evaluate whether the registrant’s
disclosure of the effect of the new standard on its accounting policies
adequately reflects the terms and conditions of its contracts.

Quantitative effect — Controls
This type of disclosure For integrated audits or when we use a controls reliance strategy, we need
might provide a point to understand management’s process and the related controls for
estimate or a range of developing the disclosures. A registrant’s controls will need to support the
effects of adopting the point estimate or range disclosed, compliance with the requirements of SAB
new leases standard. It Topic 11.M and the accuracy of the status of the registrant’s implementation.
would also generally They also need to adequately describe the new standard’s effect on the
include qualitative registrant’s accounting policies with a comparison to its current accounting
disclosures such as a policies. In order to support these objectives, the registrant would typically
discussion of the have controls that address some combination of:
significant leasing • The completeness of the lease population
activities, a description
of the new standard’s
effect on the
ASC 840 and ASC 842
registrant’s accounting
policies with a • The selection of accounting policies for the implementation of ASC 842
comparison to its and preliminary prospective accounting policies, including any practical
current accounting expedients elected
policies, and a • The calculation of the point estimate or range disclosed
discussion of whether We would evaluate whether the relevant controls are designed
the optional practical appropriately to support the specific disclosures made, and we would test
expedients will be the operating effectiveness of the controls. The extent of our testing will
applied. depend on the design of the controls and the risks they are intended to
address. We would generally expect the registrant’s controls (and our
related testing) with respect to quantitative disclosures to be more precise
than with respect to qualitative disclosures.
Substantive
We should substantively test the point estimate or range disclosed and
evaluate whether the disclosures (1) comply with the requirements of
SAB Topic 11.M, (2) accurately reflect the status of the registrant’s
implementation and (3) adequately describe the new standard’s effect on
the registrant’s accounting policies. To support our testing of the calculation
of the point estimate or range disclosed and our evaluation of the disclosures,
our substantive testing may need to include some combination of testing the
completeness of the lease population, reviewing lease contracts, evaluating
the registrant’s selection of its preliminary accounting policies and testing the
calculation of the point estimate or range.
The nature and extent of our substantive testing will depend on the
specificity of the disclosures provided by management, the materiality of
any amounts disclosed, our risk assessment for the disclosures and whether
we are testing controls. For example, we would expect to perform more
extensive testing if a registrant discloses a quantitative range that is within
PM than if it discloses a quantitative range that is multiples of PM.

No material effect — Controls
This type of disclosure For integrated audits or when we use a controls reliance strategy, we need to
indicates that the understand management’s process and the related controls for developing
registrant anticipates the disclosures. A registrant’s controls will need to support the registrant’s
that the new standard “no material effect” assertion in addition to supporting compliance with the
will not have a material requirements of SAB Topic 11.M and accurately reflecting the status of the
effect and describes the registrant’s implementation. To support these objectives, the registrant
reasons why. would typically have controls that address some combination of:
• The completeness of the lease population
ASC 840 and ASC 842
• The selection of accounting policies for the implementation of ASC 842
and preliminary prospective accounting policies, including any practical
expedients elected
• The calculation used to support management’s conclusion that the
adoption of the standard will have no material effect
We would evaluate whether the controls are designed appropriately to
support the specific disclosures made and we would test the operating
effectiveness of the control. The extent of our testing will depend on the
design of the controls and the risks they are intended to address. For
example, we would expect management to have more precise controls (and
we would expect to perform more extensive testing) if a registrant discloses
that it has completed its evaluation and concluded that the new standard
will not have a material effect than if it discloses that it does not expect
there to be a material effect based on a preliminary analysis.
Substantive
For all audits, we need to perform substantive procedures to evaluate the
registrant’s “no material effect” assertion in addition to evaluating whether
the disclosures comply with the requirements of SAB Topic 11.M and
accurately reflect the status of the registrant’s implementation. The nature
of our substantive testing may need to include some combination of testing
the completeness of the lease population, reviewing lease contracts,
evaluating the registrant’s selection of its preliminary accounting policies
and testing the calculation used to support management’s conclusion that
the adoption of the standard will have no material effect.
The nature and extent of our substantive procedures will depend on the
specific disclosures made, our risk assessment for the disclosures and
whether we are testing controls. For example, we would perform more
extensive testing if a registrant discloses that it has completed its evaluation
and concluded that the new standard will not have a material effect than if it
discloses that it does not expect there to be a material effect based on a
preliminary analysis.

D3 Responsibilities related to quarterly disclosures
During quarterly reviews, our responsibilities for SAB Topic 11.M disclosures are consistent with those
for other disclosures made by a registrant in a quarterly filing. We need to evaluate the disclosures for
consistency with the results of our quarterly review procedures and perform procedures sufficient to
conclude that no material modification to the interim financial information is needed for it to conform
with US GAAP.
D4 Disclosures are incomplete or inadequate

We would generally expect all registrants to provide SAB Topic 11.M disclosures related to the new
leases standard. If a registrant does not provide these disclosures, or if we believe a registrant’s
disclosures are not fairly presented, we follow the guidance in EY GAM MISSTATE and assess whether
the omission represents a disclosure difference that should be accumulated on our summary of audit
differences. We would also assess whether the omission represents a control deficiency that should be
accumulated on our summary of control deficiencies and evaluated for significance.

E Frequently asked questions
E1 FAQs — ICFR considerations

Question 1: When an entity’s processes and ICFR change due to the adoption of ASC 842, do the new
controls need to be designed and operating effectively in 2017 and 2018 even though an entity’s
adoption date is 1 January 2019?
Public entities will need to have process changes and changes in related controls to address risks associated
with the post-adoption period (i.e., 2019). These controls may begin to be implemented prior to the adoption
date. Because these controls are not part of management’s ICFR related to filings for 2017 and 2018, we
would not expect these controls to necessarily be operating throughout those periods, and these controls
would not be subject to management’s certification in accordance with Section 302 of the Sarbanes-Oxley
Act during those periods. However, if an entity is an SEC registrant, it is required to comply with the
disclosure requirements of SAB Topic 11.M. Management should implement a suite of controls related to
these disclosures. Refer to Appendix D for more information.
Question 2: If there has been a material change in ICFR due to the adoption of the new leases standard,
when should management disclose the change?
In accordance with Section 302 of the Sarbanes-Oxley Act, the signing officers must include (among other
things) a statement that their report discloses any changes in the entity’s ICFR that occurred during the
most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
entity’s ICFR. If there are material changes in internal control due to the adoption of the new leases standard,
management should disclose these changes no later than the quarter of adoption.
Question 3: When controls are added or modified to adopt the new leases standard (beyond those already
in place to adopt new accounting standards in general) and management and the audit committee
request that we evaluate these controls before adoption, do any design or operating deficiencies we
identify need to be aggregated, evaluated and reported in accordance with PCAOB AS 2201, An Audit
of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements,
and PCAOB AS 1301, Communications with Audit Committees?
There is no requirement to report to the audit committee deficiencies in controls over the adoption of
any new accounting guidance because they are not part of management’s ICFR until the adoption date
(also see question 1). However, because we are required to discuss the adoption of the new leases
standard with audit committees in the period leading up to adoption, it is likely that these items would be
communicated in the normal course of those discussions.
Question 4: What is the potential effect on our ICFR and financial statement audits if an entity implements
a number of new controls later in the year of adoption to identify, authorize and approve, and account for
and disclose information about its leases?
We acknowledge that an entity’s controls may evolve during the year as it implements changes necessary
to address the risks associated with the standard. If the entity has controls in place to mitigate risks
throughout the year but those controls change, we may need to modify our audit strategy. If the entity
adds controls that we believe are key but weren’t present throughout the year of adoption, we would
likely conclude that a control deficiency previously existed, and this fact should be included on our
Summary of control deficiencies for further evaluation.

The control testing procedures executed by the entity related to these controls may occur after the balance
sheet date (e.g., during the year-end financial statement close process for the period under audit). If the
entity is able to execute these controls prior to filing its financial statements, we may conclude that these
controls were designed and operating effectively as of the end of the period. However, if we have not been
able to test the number of instances suggested by our guidance based on the frequency of the control, we
refer to the guidance in EY GAM CONTROLS 8.2 Determine audit response to control exceptions to evaluate
whether we have sufficient evidence of operating effectiveness.
If we conclude that these controls were designed and operating effectively as of the end of the period,
the control deficiency that existed previously would not affect our report on ICFR. However, there could
be an effect on our CRA and ultimately the nature, timing and extent of our substantive procedures for
the financial statement audit.
Further, if the post-adoption controls do not operate for the entire first year of adoption or different controls
are in place in the first part of the year (e.g., because the entity did not complete its implementation timely
and implemented temporary controls for the first quarter), we may need to (1) perform multiple
walkthroughs, (2) perform tests of controls on multiple populations to determine whether controls were
effective for the year, (3) adjust the extent of our procedures for the financial statement audit, and
(4) determine whether there are control deficiencies that need to be evaluated for severity.
E2 FAQs — Quarterly review procedures

Question 5: What procedures do we need to perform and document to be able to complete a quarterly
review in the quarter of adoption (Q1 2019 for calendar-year public entities)?
In accordance with PCAOB AS 4105, Reviews of Interim Financial Information, we obtain an

understanding of the entity’s business activities and ICFR as they relate to the preparation and fair
presentation of both annual and interim financial information. We use this understanding to:
• Identify types of potential material misstatements in the interim financial information and consider
the likelihood of their occurrence
• Select appropriate inquiry and analytical procedures that will provide us with a basis for
communicating whether we are aware of any material modifications that should be made to the
interim financial information for it to conform with generally accepted accounting principles
For existing audit clients, our inquiries are directed at updating our documentation and our knowledge
and understanding of (1) the business, (2) significant sources of information for significant accounts and
significant disclosure processes, (3) the interim accounting processes (and how they differ from the
processes used to prepare annual financial statements) and (4) ICFR.
If a significant change is noted (e.g., all lessees will need to change their accounting process to comply
with the ASC 842 requirements), we extend our procedures to obtain an understanding of the change
and its effect, if any, on the financial information subject to our review procedures. We also consider the
need to perform walkthroughs to help us formulate our understanding of any changes. If a significant
change in ICFR results from adoption of the new leases standard, performing walkthroughs in connection
with the first quarterly review after adoption (Q1 2019 for calendar-year entities) may be the most
effective and efficient way for teams to document their understanding of the changes. Further, we
strongly recommend that such teams begin to obtain an understanding of the changes in ICFR before the
first quarterly review in order to provide feedback on management’s planned implementation.

For an AS 4105 review, we also evaluate a significant change in ICFR to determine whether, in our
judgment, any material modifications should be made to management’s disclosures about changes in
ICFR in order for management’s certifications to be accurate and to comply with the requirements of
Section 302 of the Sarbanes-Oxley Act. See EY GAM INTERIM REVIEW 3 Evaluation of management’s
certification disclosures about internal control over financial reporting.
E3 FAQs — EQR responsibilities (updated July 2018)

Question 6: What is the engagement quality reviewer (EQR) required to do in the transition to the
leases standard?
The engagement quality review is an integral part of our system of quality control, and the EQR should be
involved in evaluating the audit strategy for auditing the entity’s adoption of the standard (i.e., the
significant judgments made, including significant accounting judgments, key estimates and significant
risks identified by the audit team, and related conclusions reached by the audit team). Examples of
procedures the EQR may perform include having discussions with the partner in charge of the audit and
other members of the audit team, participating in the team events and reviewing the Form 276US Leases
(ASC 842) implementation audit form and/or the workpapers that are referred to in Form 276US that
document the matters required by the form.
The nature, timing and extent of our procedures will vary with the nature and complexity of the audit,
including the significance of the effects of adopting the new leases standard. It is important that the EQR
exercise his or her professional judgment to determine the nature, timing and extent of the procedures
necessary to address the requirements as well as any other procedures that, in his or her professional
judgment, are necessary to provide concurring approval for issuance of the auditor’s report or for the
entity to use the interim review report.
Refer to the US APM 1.2.2 Engagement quality review for audits, and US APM 1.2.3 Engagement quality
review for reviews of interim financial information, for further guidance on EQR requirements for audits
of financial statements or reviews of interim financial information.
E4 FAQs — Change in auditor

Question 7: If we become the auditor during the transition period or in the year of adoption of the new
leases standard and the prior-period financial statements that require adjustments were audited by a
predecessor auditor, may we audit the adjustments to the prior-period financial statements and
related disclosures? (Note: This FAQ is not applicable if the FASB finalizes the proposed optional
transition method and the entity elects to apply it.)
Pursuant to US Reporting Manual 2.23, as a matter of policy, we will not accept an engagement to audit
only the restatement adjustments relating to retroactive accounting changes that (1) have a significant
effect on previously reported amounts or (2) affect previously reported net income or net assets.
In addition, we generally will not accept engagements to re-audit financial statements that previously
were audited by other auditors but we occasionally will do so after consideration of all relevant factors.
We are required to obtain advance approval from the Professional Practice Director assigned to the
Region and the Director of Regional Professional Practice or the Deputy Vice Chair — Assurance
Professional Practice prior to accepting any engagement to re-audit financial statements previously
audited by other auditors. These matters require advance approval from the Professional Practice
Director and should not be delegated to other partners within the Professional Practice group
assigned to the Region.

Question 8: If EY becomes the predecessor auditor in 2019 (i.e., we are no longer the auditor beginning in
2019) and the new auditor needs to issue an opinion on an entity’s 2019 financial statements and the entity
recasts the comparative periods it presents that year, should we reengage with the entity to audit the
adjustments presented in the financial statements for the comparative periods?
Pursuant to PCAOB Staff Guidance Section 100.03, we could be reengaged to audit the retrospective
application of the change in accounting principle for the adjustments as long as we are independent of
the entity. Generally, we would expect that we would be reengaged to audit the retrospective periods
since we opined on the periods covered by the retrospective adjustments.
Therefore, we would perform modified client acceptance procedures to reestablish a professional

relationship with the client in accordance with SEC Manual 10.9.7, Reporting on financial statements of
former clients, and comply with the US Independence Guidance G401.3, Former US SEC audit clients. We
would also perform the post-report review procedures included in SEC Manual 10.9.7.2.
When we amend our auditor’s report for the change in accounting principle, we retain the original date of
the auditor’s report and add a second date (i.e., dual date) that is restricted to the amendment. The dual-
date informs the user that our procedures subsequent to the original date on our auditor’s report were
restricted to the subsequent amendment of the financial statements. Refer to US Reporting Manual
2.22.4.1, Management agrees to amend financial statements, for further detail.
E5 FAQs — Engagement management

Question 9: Do I need to obtain preapproval for professional services related to an entity’s adoption of
the new leases standard?
We expect that all services provided to our SEC issuer audit clients related to the adoption of the new
leases standard will require specific audit committee preapproval, particularly services that are not part
of the execution of our audit. Teams should separately identify such procedures as part of the audit
preapproval process to avoid any confusion. Services that are a required part of our annual audit should
be included in the audit committee preapproval for the annual audit.
When we seek audit committee preapproval of services that are not required as part of our audit, we
should specifically describe the services to be provided, which could include accounting consultations on
new accounting standards, diagnostic services or other related services. While some of our audit teams
have “accounting consultation” preapprovals to address periodic discussions, this description by itself
may not be sufficient to give the audit committee a thorough understanding of the scope of our services,
especially if our services extend beyond answering periodic implementation-related questions. In
addition, the description of our services should specifically include a discussion of the use of tools and
enablers, if these are provided, and the specific independence considerations evaluated as part of
assessing service permissibility. Finally, PCAOB Rules 3524 and 3525 should also be considered where
applicable. Refer to question 11 for more information.
Sample preapproval language for audit committees is available to assist audit teams with this
communication. Refer to question 14.
As a reminder, audit committee preapproval is required at least annually, although in some instances it
may be required more frequently, particularly if the scope of services change over time.

Question 10: As part of preapproval of professional services related to an entity’s adoption of the new
leases standard, when would an engagement team need to make expanded disclosures to the audit
committee in accordance with PCAOB Rule 3525 (services related to ICFR) or PCAOB Rule 3524
(related to tax services)? Also, what preapprovals are required for permissible services provided in
connection with a “diagnostic” related to an entity’s implementation of the new standard?
Some of the services we provide related to the new leases standard may include elements that result in
EY providing non-audit services that affect a client’s ICFR or certain tax services, both of which have
expanded preapproval requirements as outlined in PCAOB Rule 3525 (non-audit ICFR services) and
PCAOB Rule 3524 (tax services).
PCAOB Rule 3525 applies to non-audit services that are not a required part of our annual audit of the financial
statements and ICFR. If we are reviewing proposed changes to risk and control matrices in advance of the
client’s implementation of these changes, commenting and proposing recommendations on potential changes
to a company’s financial processes as a result of the new leases standard, or assessing the effectiveness of
internal controls prior to their implementation (e.g., reviewing the results of a client’s diagnostic), we must
comply with the required PCAOB Rule 3525 disclosures. In evaluating whether services are included in our
audit scope, we should presume that if competitive proposals are involved, the procedures are outside the
required scope of our audit and the requirements of PCAOB Rule 3525 apply. Similarly, the provision of tax
compliance or tax advisory services related to the implementation of the new leases standard require
compliance with PCAOB Rule 3524. Documenting the substance of our discussions with the audit committee
using Form U354 PCAOB Rule 3524(c) Audit Committee Preapproval documentation memorandum,
Form U355 PCAOB Rule 3525(c) Audit Committee Preapproval documentation memorandum or equivalent
documentation is required to comply with the PCAOB Rules.
We expect our preapproval communications with audit committees to be transparent about

independence risks or threats associated with performing such services and any services we provide to
be preapproved in accordance with the additional PCAOB requirements. That is, we need to discuss and
document independence threats related to designing or implementing a client’s internal controls, which is
a management function, or being placed in a position of auditing our own work.
Question 11: Where should fees for services provided to an audit client related to implementing the
new standard (e.g., testing of SAB Topic 11.M disclosures, client discussions or consultations, internal
control reviews or testing) be classified in the proxy disclosure?
Registrants should generally classify these fees as either “audit fees” or “audit-related fees” because
these services often relate to or reasonably relate to the performance of the audit or review of the
registrant’s financial statements.
As a reminder, Item 9 (e) of SEC Schedule 14A (proxy statement) requires the disclosure of fees as audit
fees if they are for “professional services rendered by the principal accountant for the audit of the
registrant’s annual financial statements and review of financial statements” and as audit-related fees if
they are for “assurance and related services by the principal accountant that are reasonably related to
the performance of the audit or review of the registrant’s financial statements and not reported under
paragraph (e) (1) (audit fees).”
Refer to the EY publication, 2018 proxy statements: an overview of the requirements and observations
about current practice, for further guidance about classifying auditor fees.

Question 12: What are some examples of services that likely would not be classified as “audit” or
“audit related” in the proxy disclosure?
Although we generally expect fees for services related to the implementation of the new leases standard
to be classified as “audit fees” or “audit-related fees,” registrants should carefully evaluate the scope of
services performed to determine whether the nature of the services reasonably relates to the performance
of the audit or review of the registrant’s financial statements. For example, some of the permissible
services involve advising and providing recommendations about the registrant’s project management
office (e.g., project setup, governance, communication protocols) or providing insights on the registrant’s
communication plan with its key stakeholders, which may not reasonably relate to the performance of the
audit. In addition, some of the services may involve tax compliance and planning in connection with adoption
of the new leases standard, and any fees related to these services would be classified as “tax fees.”
Question 13: What resources are available to help audit teams that need to obtain audit committee
preapproval for services related to the implementation of the new leases standard?
Teams can use the standard audit committee preapproval templates and, more specifically, the Rule
3525 Word template developed for revenue recognition services as a baseline, given the similarity of
issues related to adopting both standards.
For ad hoc approvals of services throughout the year, we can use the quarterly audit committee preapproval
template, which includes PCAOB Rules 3524 and 3525 disclosures.
Refer to the Audit committee supplemental topics page on EY Atlas to locate the updated Audit
committee preapproval — Annual supplement, which provides sample preapproval language to assist audit
teams in their annual communications.

F Example risk and control matrix for
lessees
The accompanying RCM is designed to assist audit teams with their risk assessment process for a lessee’s
implementation of ASC 842. It assumes that the entity has elected the package of practical expedients.
The RCM contains examples of common risks and controls and may not address all of an entity’s risks
and controls. We also expect our clients to document their controls in more detail than we include in the
matrix (e.g., the frequency with which the control will operate, the reports that the control owner will use
to execute the control). Using this RCM is not a substitute for reading the guide. This RCM is for internal
use only and cannot be shared with clients due to independence restrictions.

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© 2018 Ernst & Young LLP.

All Rights Reserved.
SCORE no. 01892-181US
(revised July 2018)
This material has been prepared for general informational purposes only and is not intended to be
relied upon as accounting, tax, or other professional advice. Please refer to your advisors for
specific advice.

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Guide to

Glossary of key terms ...................................................................................................... 1

Guide to auditing the implementation of ASC 842, Leases | i

Guide to auditing the implementation of ASC 842, Leases | ii

• Prospective period — The period that begins on the effective date.

Guide to auditing the implementation of ASC 842, Leases | 1

Guide to auditing the implementation of ASC 842, Leases | 2

1.2 Leases audit roadmap for lessees

Auditing the implementation Auditing the prospective period

2. Identify risks 3. Develop 6. Update risk assessment, 7. Update

Guide to auditing the implementation of ASC 842, Leases | 3

1.3 Summary of effective dates and transition

SAB Topic 11.M disclosures Effective

2016 2017 2018 2019 2020 2021

Leases standard issued, Modified

Guide to auditing the implementation of ASC 842, Leases | 4

Proposed optional transition method

The package of practical expedients

• Whether any expired or existing contracts are or contain leases

• Lease classification for any expired or existing leases

Guide to auditing the implementation of ASC 842, Leases | 5

The hindsight practical expedient

Easements practical expedient

Short-term lease policy election

Guide to auditing the implementation of ASC 842, Leases | 6

1.5 Transition accounting considerations

The components of the initial measurement of the lease liability include:

• Remaining minimum rental payments as determined under ASC 840 9

• Amounts it is probable a lessee will owe under a residual value guarantee

• Prepaid or accrued lease payments

• Remaining balance of any lease incentives received

• Unamortized initial direct costs

• Carrying amount of an exit or disposal cost (ASC 420) liability

Guide to auditing the implementation of ASC 842, Leases | 7

1.6 Effect of implementation on our audit approach and planning

Guide to auditing the implementation of ASC 842, Leases | 8

Guide to auditing the implementation of ASC 842, Leases | 9

Guide to auditing the implementation of ASC 842, Leases | 10

Inherent risk factors — Implementation of ASC 842

Guide to auditing the implementation of ASC 842, Leases | 11

Auditing the implementation

2.1 Understand management’s process for implementing ASC 842

2.1.1 Critical assessment of management’s timeline

Guide to auditing the implementation of ASC 842, Leases | 12

As we assess management’s timeline, we need to be mindful that in addition to implementing policies,

Guide to auditing the implementation of ASC 842, Leases | 13

2.2 Understand entity-level controls

Guide to auditing the implementation of ASC 842, Leases | 14

COSO 2013 Framework principles Example entity-level controls addressing principles

Guide to auditing the implementation of ASC 842, Leases | 15

Guide to auditing the implementation of ASC 842, Leases | 16

Example WCGWs — completeness of the population of leases

Guide to auditing the implementation of ASC 842, Leases | 17

• The remaining lease term

• Cumulative prepaid or accrued lease payments

• Unamortized lease incentives

• Unamortized initial direct costs