Appendix B — Differences Between U.S. GAAP and IFRS Accounting Standards
Although the FASB and IASB conducted joint deliberations and intended to
converge their respective leasing standards (ASC 842 and IFRS 16), there are several
notable differences between the two standards. The table below summarizes these
differences.
Key Provision | U.S. GAAP (ASC 842) | IFRS Accounting Standards (IFRS 16) |
---|---|---|
Scope | Scope includes leases of all PP&E and excludes:
| Scope includes leases of all assets (not limited to PP&E). Exceptions are similar to those in ASC 842. Lessees can elect to apply the guidance to rights to use certain intangible assets. |
Short-term lease definition | A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise. | A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option (i.e., the likelihood that the purchase option will be exercised is not considered). |
Leases of low-value assets | No exemption under U.S. GAAP. However, the FASB believes that an entity may
adopt a reasonable capitalization policy based on
materiality. | A lessee may elect to recognize the payments for a lease of a low-value asset on
a straight-line basis over the lease term (in a manner
similar to its recognition of an operating lease under IAS
17). Such a lease would not be reflected on the lessee’s
balance sheet. IFRS 16 does not define “low value”; however,
the Basis for Conclusions refers to assets individually with
a value, when new, of $5,000 or less. In addition, an entity may adopt a reasonable capitalization policy based on
materiality. |
Related-party leases (leases between entities under common
control)
|
Before the adoption of ASU
2023-01, entities are required to
determine whether related-party arrangements between
entities under common control contain a lease. If such an
arrangement is deemed to be or contain a lease, the entity
must classify and account for the lease in a manner
consistent with the classification and measurement in an
arrangement with an unrelated party (i.e., “on the basis of
the legally enforceable terms and conditions of the
lease”).
After the adoption of ASU 2023-01, private companies and NFP
entities that are not conduit bond obligors can elect, as a
practical expedient on an arrangement-by-arrangement basis,
to use the written terms and conditions of a common-control
arrangement to determine (1) whether a lease exists and, if
so, (2) the classification of and accounting for that
lease.
|
There is no explicit guidance on the accounting for
related-party leases under IFRS 16 and no specific
consideration of the amortization period of leasehold
improvements in a common-control arrangement under IAS
16.
|
Lease classification | Lessee — There are two accounting models for leases, and the model will
dictate the pattern of expense recognition associated with
the lease. Therefore, a lessee must perform a lease
classification assessment as of the commencement date.
Under ASC 842-10-25-2, a lessee must classify a lease as a
finance lease if any of the following criteria are met:
If none of these criteria are met, the lease would be classified as an operating
lease. Lessor — A lessor must perform a lease classification assessment as of
the commencement date.
The criteria governing when a lessor must classify a lease as
a sales-type lease are the same as those that govern when a
lessee must classify a lease as a finance lease (noted
above). If none of these criteria are met, the lessor would
classify the lease as a direct financing lease in accordance
with ASC 842-10-25-3 if (1) the sum of the lease payments
and any third-party guarantee of the residual value “equals
or exceeds substantially all of the fair value of the
underlying asset” and (2) “[i]t is probable that the lessor
will collect the lease payments plus any amount necessary to
satisfy a residual value guarantee.” Otherwise, the lease
would be classified as an operating lease.
In addition, ASC 842-10-25-3A requires a
lessor to classify a lease with variable lease payments that
do not depend on an index or rate as an operating lease at
lease commencement if (1) the lease would have been
classified as a sales-type or direct financing lease in
accordance with the classification criteria in ASC
842-10-25-2 and 25-3, respectively, and (2) the lessor would
have recognized a selling loss on the lease commencement
date. For new leases, such classification should be made at
lease commencement; amended leases should be classified as
of the effective date of the modification. | Lessee — There is only a single accounting model for leases (i.e., all
leases are effectively equivalent to finance leases under
ASC 842), so classification of leases is unnecessary. Lessor — A lessor must perform a lease classification assessment as of
the inception date.
A lease is classified as a finance lease if it transfers
substantially all of the risks and rewards related to
ownership; otherwise, it is classified as an operating
lease. This determination is not based on meeting any
criterion. However, examples of situations that individually
or in combination would indicate a finance lease include:
Other situations in which a lease could be a finance lease include:
|
Lessee’s subsequent accounting for ROU asset and lease expense | The accounting depends on the lease classification: Finance leases — The ROU asset is generally amortized on a straight-line
basis. This amortization, when combined with the interest on
the lease liability, results in a front-loaded expense
profile. Interest and amortization are presented separately
in the income statement. Operating leases — Lease expense generally results in a straight-line
expense profile that is presented as a single line in the
income statement. As interest on the lease liability is
generally declining over the lease term, amortization of the
ROU asset is increasing over the lease term to provide a
constant expense profile. | A single accounting model. The ROU asset is generally amortized on a
straight-line basis. This amortization, when combined with
the interest on the lease liability, results in a
front-loaded expense profile. That is, the single lessee
accounting model under IFRS 16 is similar to that of a
finance lease under ASC 842. Interest expense on the lease
liability and amortization of the ROU asset are presented
separately in the income statement. |
Lessor accounting | Core model — Substantially retains the lessor measurement approach in ASC
840 for operating, direct financing, and sales-type
leases. Selling profit for a sales-type lease is recognized at lease commencement. Selling profit on a direct financing lease, if any, is deferred and recognized as interest income over the lease term. Separating lease and nonlease components — ASC 842-10-15-42A offers
lessors a practical expedient under which they are allowed
not to separate lease and nonlease components when certain
conditions are met. Sales tax and lessor costs — ASC 842-10-15-39A offers lessors a practical
expedient under which they can present sales taxes collected
from lessees on a net basis. In addition, lessor costs paid
directly to a third party by a lessee should be excluded
from variable payments. Fair value of underlying asset — ASC 842-30-55-17A provides specific fair
value considerations for lessors that are not manufacturers
or dealers in such a way that the fair value of the
underlying asset is its cost unless a significant lapse of
time has occurred. | Core model — Substantially retains the lessor measurement approach in IAS
17 for operating and finance leases. Selling profit for a finance lease is recognized at lease commencement. Separating lease and nonlease components — A similar practical expedient
is not available. Sales tax and lessor costs — A similar practical expedient is not
available. In addition, there are no similar provisions
related to lessor costs paid directly to a third party by a
lessee. Fair value of underlying asset — A similar amendment to the definition of fair value has not been made. |
Recognition of variable lease payments that do not depend on an index or rate | A lessee should recognize variable lease payments not included in its lease liability (e.g., payments based on the achievement of a target) in the period in which achievement of the target that triggers the variable lease payments becomes probable. | A lessee should recognize variable lease payments not included in its lease liability (e.g., payments based on the achievement of a target) in the period in which the target is achieved. |
Reassessment of variable lease payments that depend on an index or rate | A lessee reassesses variable payments based on an index or rate only when the lease obligation is remeasured for other reasons (e.g., a change in lease term or modification). | A lessee reassesses variable payments based on an index or rate whenever there
is a change in contractual cash flows (e.g., the lease
payments are adjusted for a change in the CPI) or when the
lease obligation is remeasured for other reasons. |
Lessee’s incremental borrowing rate | The lessee’s incremental borrowing rate is the rate a lessee would pay to
borrow, on a collateralized basis over a similar term, an amount equal to the lease
payments in a similar economic environment. | The lessee’s incremental borrowing rate is the rate a lessee would pay to borrow
over a similar term, and with a similar security, the funds
necessary to obtain an asset with a
value similar to the ROU asset in a similar economic
environment. |
Discount rate for private companies | Private-company lessees may, as an accounting policy election by asset class,
choose to use a risk-free rate when measuring and
classifying a lease. | No exemptions provided for private-company lessees. |
Modifications of operating leases for
lessors
|
If an operating lease is modified and not
accounted for as a separate contract, the treatment depends
on the classification of the modified lease:
|
A lessor should account for a modification
to an operating lease (not accounted for as a separate
contract) as a new lease from the date of the modification.
The lessor should include any prepaid or accrued lease
payments related to the original lease in the lease payments
associated with the new lease.
|
Modifications that reduce the lease term for lessees
|
A reduction in the lease term is not considered a
decrease in the scope of the lease. A lessee should thus
remeasure the lease liability, with a corresponding
reduction in the ROU asset, but should not recognize
any gain or loss as of the effective date of the
modification unless the ROU asset is reduced to zero.
|
A reduction in the lease term is considered a decrease in the
scope of the lease. A lessee should thus remeasure the lease
liability, with a proportionate reduction in the ROU asset,
and recognize a gain or loss for any difference as of the
effective date of the modification.
|
Collectibility of lease payments
|
A lessor considers the collectibility of
lease payments when determining whether a lease should be
classified as a direct financing lease or an operating
lease. A lessor does not assess the collectibility of
lease payments when determining whether a lease should be
classified as a sales-type lease.
As a result of changes in the collectibility
of lease payments for an operating lease, lease income may
be recognized on a cash basis. Collectibility of lease
payments for a direct financing or sales-type lease is
assessed under the CECL guidance in ASC 326.
|
There is no explicit guidance on considering
the collectibility of lease payments within IFRS 16.
|
Modifications of sales-type or direct financing leases for lessors |
A lessor’s accounting for a modification to
a sales-type or direct financing lease depends on the
classification of the original and modified leases:
| A lessor’s accounting for a modification to a finance lease (not accounted for
as a separate contract) depends on whether the lease would
have been classified as an operating lease if the
modification had been in effect at lease inception:
|
Sublease | The intermediate lessor would classify a sublease by considering the underlying asset of the head lease (instead of the ROU asset) as the leased asset in the sublease. | The intermediate lessor would classify a sublease by considering the ROU asset of the head lease as the leased asset in the sublease. |
Sale-and-leaseback arrangements | The transaction would not be considered a sale if (1) it does not qualify as a
sale under ASC 606 or (2) the leaseback is a finance
lease. A repurchase option would result in a failed sale unless (1) the exercise price
of the option is at fair value and (2) alternative assets
are readily available in the marketplace. If the transaction qualifies as a sale, the entire gain on the transaction would be recognized. | The transaction would not be considered a sale if it does not qualify as a sale
under IFRS 15. A repurchase option would always result in a failed sale. For transactions that qualify as a sale, the gain would be limited to the amount related to the residual portion of the asset sold. The amount of the gain related to the underlying asset leased back to the lessee would be offset against the lessee’s ROU asset.
IFRS 16 has been amended to require that a
seller-lessee determine “lease payments” or “revised lease
payments” such that the seller-lessee does not recognize a
gain or loss related to the right of use it retains. This
amendment is effective for annual periods beginning on or
after January 1, 2024. |
Balance sheet presentation | If a lessee does not separately present ROU assets and lease liabilities on the balance sheet, the lessee must disclose the line item in which its ROU assets and lease liabilities are included. This requirement applies to both finance leases and operating leases. | If a lessee does not separately present ROU assets and lease liabilities on the balance sheet, the lessee must present the ROU assets as if the underlying asset were owned and disclose the line item in which its ROU assets and lease liabilities are included. |
Statement of cash flows | A lessee should present payments associated with operating leases as an operating activity in the statement of cash flows. A lessee should present payments associated with finance leases in the statement of cash flows as (1) a financing activity, for the principal portion of the payment, and (2) an operating activity, for the interest portion of the payment. | As noted in the “Lessee’s subsequent accounting for ROU asset and lease expense” key provision above, a lessee is required to use a single approach (similar to the FASB’s finance lease approach) to subsequently account for the ROU asset. For this reason, the lessee should account for payments of interest as either a financing or an operating activity in the statement of cash flows, depending on the lessee’s accounting policy election under IAS 7. |
In addition, while certain of the presentation and disclosure requirements in ASC 842 are similar to those in IFRS 16, there are also certain differences (quantitative and qualitative) in this area.
Other differences between ASC 842 and IFRS 16 may also arise as a result of
existing differences between U.S. GAAP and IFRS Accounting Standards, including
those related to (1) impairment of financial instruments and long-lived assets other
than goodwill and (2) the accounting for investment properties. See Deloitte’s
Roadmap Comparing IFRS Accounting Standards and U.S.
GAAP: Bridging the Differences for additional
considerations.