Appendix B — Differences Between U.S. GAAP and IFRS Accounting Standards
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 | ASC 842 | 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 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:
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:
Other situations in which a lease could be a finance lease include:
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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. |
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Modifications of operating leases for
lessors
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If an operating lease is modified and not
accounted for as a separate contract, the treatment depends
on the classification of the modified lease:
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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.
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Modifications that reduce the lease term for lessees
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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.
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Collectibility of lease payments
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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.)
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There is no explicit guidance on considering
the collectibility of lease payments within IFRS 16.
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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:
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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.
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Response to COVID-19
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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.
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In May 2020, the IASB issued an
amendment2 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.
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Common-control lease arrangements
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Upon adoption of ASU 2023-01:
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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.
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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
1
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.
2
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.