ASC 842 lease memo with AI: abstract the lease and draft the accounting memo

When to use it

Use it for new real-estate or equipment leases, amendments (extensions, expansions, rent concessions), and service contracts that might contain an embedded lease. Abstracting a 60-page lease is where the hours go, and that part is extraction a model does well if it has to cite the page for every term.

Input data

• The full executed lease and all amendments (PDF; make sure it's text-searchable or OCR'd).
• Your policy elections: short-term lease exemption, whether you combine lease and non-lease components (by asset class), and, for private companies, whether you elected the risk-free rate by asset class.
• Your incremental borrowing rate (IBR) approach or the rate provided by treasury.
• Economic life and fair value of the underlying asset, if classification could be close (mostly equipment).
• Your memo template, if you have one.

The prompt

Replace the [bracketed] items. Paste it with your files attached. It works in any capable assistant; tool-specific notes are in the steps.

You are helping me document the accounting for a lease under ASC 842 for [lessee entity]. I am the accountant responsible for the conclusions; you are preparing a draft.

Attached: [lease agreement and amendments]. Our elections: [short-term exemption Y/N], [combine lease and non-lease components for [asset class] Y/N], [private company risk-free rate election Y/N]. Discount rate to use: [rate and source, or "to be provided"].

PART 1 – Lease abstract. For every item, quote the relevant language and give the page/section reference. If not found, write "NOT FOUND" – do not infer.
- Parties, premises/asset description, commencement date (and how it's defined), expiration
- Base payments schedule (every step), free rent, abatement
- Renewal, termination and purchase options: terms, notice periods, pricing
- Variable payments: CAM, taxes, insurance, index-linked escalators (CPI) vs fixed escalators
- Tenant improvement allowances / lease incentives, landlord-owned vs lessee-owned improvements
- Residual value guarantees, security deposit, restoration obligations
- Non-lease components (services) and whether separate pricing is stated
- Subleasing, assignment, and any substitution rights the lessor has

PART 2 – Draft memo outline, following ASC 842. For each section, set out the relevant facts from the abstract and the questions I need to answer. Do NOT state a conclusion where judgment is required. Mark those "[JUDGMENT – preparer to conclude]".
1. Does the contract contain a lease (identified asset; right to obtain substantially all economic benefits; right to direct use)?
2. Separation of lease and non-lease components / application of our election
3. Lease term: non-cancelable period plus options reasonably certain to be exercised. List the factors that bear on "reasonably certain"
4. Lease payments included in measurement (fixed, in-substance fixed, index-based at the commencement-date index, purchase option if reasonably certain, termination penalties, RVG amounts probable of being owed); variable payments excluded
5. Classification: list each of the five criteria in ASC 842-10-25-2 with the facts relevant to each
6. Discount rate
7. Initial measurement components: lease liability; ROU asset = liability + initial direct costs + prepaid lease payments – lease incentives received
8. Disclosure data points to capture

PART 3 – A list of open questions and missing information.

When you cite ASC paragraphs, list them separately under "Citations to verify". Do not invent paragraph numbers.

Steps

1. Confirm the PDF is complete (all exhibits and amendments) and searchable.
2. Run Part 1 and verify every abstracted term against the cited page. This is the step that saves the time, and it only counts once you've checked it.
3. Run Part 2. Answer each JUDGMENT item yourself, with your reasoning in your own words.
4. Calculate the liability and ROU asset in your lease software or schedule, not from AI arithmetic, and agree the payment stream to the abstract.
5. Verify every ASC citation against the Codification.
6. Route the memo for technical review and controller approval per your policy. Share it with auditors when they ask.

Control map

What the AI may do, step by step. How ratings work.

Audit trail

• File the lease, the AI abstract with page references, and the final memo together.
• The memo should show the preparer's reasoning on each judgment. Don't paste AI phrasing as a conclusion.
• Keep the measurement schedule from the system of record and tie the payment stream to the abstract.

Failure modes

• Missed amendments or exhibits, especially rent schedules in an exhibit, or a later amendment changing the term.
• Fixed vs variable escalators confused. A fixed 3% bump belongs in lease payments; CPI-based changes after commencement don't.
• Invented or wrong ASC paragraph citations. Always verify them.
• Commencement date taken from the signature date, rather than the date the lessor makes the asset available.
• Overconfident "reasonably certain" conclusions based on generic reasoning rather than your facts (leasehold improvements, relocation costs, business plans).

Data handling

• Use a company-approved AI workspace whose terms say your inputs are not used for model training. Check your plan; don't assume it.
• Strip or mask what the task doesn't need: employee names, bank account numbers, customer PII, SSNs or TINs.
• If you are a public company, treat pre-release results as material non-public information and keep them inside approved systems.