Appendix B — Differences Between U.S. GAAP and IFRS Accounting Standards

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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.

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.

Footnotes

The deferral provided by ASU 2020-05 applies to public NFPs that have not issued financial statements or made financial statements available for issuance as of June 3, 2020. Public NFPs that have issued financial statements or have made financial statements available for issuance before that date must comply with the effective dates prescribed for public companies above.

IFRS Taxonomy Update, COVID-19-Related Rent Concessions — amendment to IFRS 16. Further, in March 2021, the IASB issued Covid-19-Related Rent Concessions Beyond 30 June 2021 — amendment to IFRS 16, which extends the period during which the practical expedient can be applied.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.

Key Provision	ASC 842	IFRS 16
Scope	Scope includes leases of all PP&E and excludes: Rights to use intangible assets. Rights to explore for or use nonregenerative resources. Rights to use biological assets. Rights to use inventory. Rights to use assets under construction.	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 will be able to 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). These leases 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 will be able to adopt a reasonable capitalization policy based on materiality.
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: “The lease transfers ownership of the underlying asset.” “The lease grants . . . an option to purchase the underlying asset that the lessee is reasonably certain to exercise.” “The lease term is for the major part of the remaining economic life of the underlying asset.” “The present value of the sum of the lease payments and any residual value guaranteed by the lessee . . . equals or exceeds substantially all of the fair value of the underlying asset.” “The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor.” 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.	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: The lease transfers ownership of the underlying asset. The lease grants an option to purchase the underlying asset that the lessee is reasonably certain to exercise. The lease term is for the major part of the remaining economic life of the underlying asset. The present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset. The underlying asset is of a specialized nature and has no alternative use to the lessor. Other situations in which a lease could be a finance lease include: The lessee bears the lessor’s losses for early cancellation. Gains or losses related to the asset at the end of the lease accrue to the lessee. The lessee can renew the lease for rent that is substantially lower than the market rate.
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 — ASU 2018-11 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 — ASU 2018-20 offers lessors a practical expedient under which they can present sales taxes collected from lessees on a net basis. ASU 2018-20 also added a requirement that lessor costs paid directly to a third party by a lessee should be excluded from variable payments. Fair value of underlying asset — ASU 2019-01 amends the definition of fair value 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 can elect to use a risk-free rate.	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: Modified lease classified as an operating lease — The lessor should include any prepaid or accrued lease rentals related to the original lease in the lease payments associated with the new lease. Modified lease classified as a sales-type or direct financing lease — The lessor should derecognize any deferred rent liability or accrued rent asset and adjust the selling profit/loss.	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: Original lease is a sales-type lease: Modified lease is a sales-type or direct financing lease — The discount rate for the modified lease is adjusted so that the initial net investment in the modified lease equals the carrying amount of the net investment in the original lease immediately before the modification date. Modified lease is an operating lease — The carrying amount of the underlying asset should equal the net investment in the original lease before the modification date. Original lease is a direct financing lease: Modified lease is a direct financing lease — The discount rate for the modified lease is adjusted so that the initial net investment in the modified lease equals the carrying amount of the net investment in the original lease immediately before the modification date. Modified lease is a sales-type lease — The lessor calculates the selling profit/loss on the lease, the fair value of the underlying asset, and the asset’s carrying amount immediately before the modification date. Modified lease is an operating lease — The carrying amount of the underlying asset should equal the net investment in the original lease before the modification date.	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: Modified lease would have been classified as an operating lease — The lessor should account for the lease modification as a new lease from the modification date. The carrying amount of the underlying asset should be measured as the net investment in the lease immediately before the modification date. Modified lease would not have been classified as an operating lease — The lessor applies the requirements in IFRS 9.
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.
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.
Effective date	Public entities — Effective for annual reporting periods beginning after December 15, 2018. Public NFPs1 — Effective for annual reporting periods beginning after December 15, 2019. Nonpublic entities — Effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted.	Effective for annual reporting periods beginning on or after January 1, 2019. Early adoption is permitted provided that the entity has also adopted IFRS 15.
Transition	ASC 842, as originally issued, required entities to transition to ASC 842 by using a modified retrospective approach. Under the modified retrospective approach, entities must restate comparative periods under ASC 842, with certain practical reliefs. Thereafter, the FASB issued ASU 2018-11, which gives entities the option of not restating comparative periods and applying ASC 842 as of the adoption date. Moreover, ASU 2018-01 provides a transition practical expedient for existing or expired land easements that were not previously accounted for as leases in accordance with ASC 840. The practical expedient allows entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to ASC 842.	Entities may elect to transition to IFRS 16 by using either a full retrospective approach or a modified retrospective approach. Under the modified retrospective approach, entities do not restate comparative periods. Entities should recognize a cumulative adjustment to retained earnings as of the date of initial adoption (e.g., January 1, 2019). A similar transition practical expedient for existing or expired land easements is not available.
Response to COVID-19	On April 10, 2020, the FASB issued a staff Q&A that allows entities to forgo performing a lease-by-lease legal analysis to determine whether contractual provisions in an existing lease agreement provide enforceable rights and obligations related to lease concessions (i.e., not a modification) as long as (1) the concessions are related to the effects of the COVID-19 pandemic and (2) the changes to the lease do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The staff Q&A affirms that entities may make an election to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with ASC 842 as applicable or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement and are thus outside the modification framework.	In May 2020, the IASB issued an amendment 2 to IFRS 16 that provides a practical expedient under which a lessee (the amendment does not apply to lessors) can elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee applying this practical expedient would account for a rent concession as if it were not a lease modification under IFRS 16. The practical expedient applies only to rent concessions that are a direct consequence of the COVID-19 pandemic and only if all of the following conditions are met: (1) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; (2) any reduction in lease payments affects only payments that were originally due on or before June 30, 2022 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before June 30, 2022, and increased lease payments that extend beyond June 30, 2022); and (3) there are no substantive changes to other terms and conditions of the lease.
Common-control lease arrangements	Upon adoption of ASU 2023-01: Private companies, as well as not-for-profit entities that are not conduit bond obligors, may elect a practical expedient of using the written terms and conditions in a common-control agreement. A lessee in a common-control arrangement is required to amortize leasehold improvements that it owns over the improvements’ useful life to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease.	There is no comparable practical expedient for common-control arrangements under IFRS 16 and no specific consideration of the amortization period of leasehold improvements in a common-control arrangement under IAS 16.