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Lease accounting under ASC 842 and IFRS 16

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Lease accounting under ASC 842 and IFRS 16: Changes in lease accounting
standards and their implications for lessees and lessors
Introduction
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
Leasing assets is a popular financing alternative used widely across industries. Earlier lease
accounting standards such as ASC 840 and IAS 17 did not capture leased assets and
liabilities appropriately on balance sheets. Major changes were introduced through new
standards ASC 842 and IFRS 16 converging global lease accounting. This paper examines
key changes in lease definitions, lessee and lessor accounting models and disclosure
requirements under the new standards. It analyzes implications of bringing operating leases
on-balance sheet and issues in transitioning to the new framework.
Definition of a Lease
The new standards aim to address the issue of off-balance sheet treatment of operating
leases by first clearly defining a lease. IFRS 16 and ASC 842 define a contract as a lease if
it conveys the right to control the use of an identified asset for a period of time in exchange
for consideration.
- Control is considered to exist if the customer has both the right to direct the identified
asset's use and to obtain substantially all economic benefits from that use.
- Consideration includes both fixed and variable lease payments related to the right to use
the asset during the lease term.
- Identification of the asset should be specific and not a portfolio or capacity portion of an
asset.
This definition results in fewer contracts being excluded from lease accounting than under
the previous standards. Short-term and low value asset exemptions continue.
Lessee Accounting Model
Both IFRS 16 and ASC 842 adopt a single lessee accounting model requiring most leases to
be recorded on the balance sheet.
- A lessee recognizes a right-of-use asset representing its right to use the underlying asset.
- A lease liability for its obligation to make lease payments is also recognized at the present
value of unpaid lease payments.
- Interest on the lease liability and depreciation of right-of-use asset are recorded separately
in the income statement.
- Variable lease payments not included in lease liability are expensed as incurred.
- Certain practical expedients allow simpler treatment for short-term leases, low value asset
leases and hindsight in determining lease term.
This brings operating leases onto the balance sheet, allows for comparability between
leased and owned assets and provides better information to assess financing activities and
leverage. However, it involves greater complexity and judgment in application.
Lessor Accounting
The new standards retain dual lessor accounting models - finance lease and operating lease
- based on whether the lessor transfers substantially all risks and rewards of ownership.
- In a finance lease, a lessor derecognizes the underlying asset and recognizes a net
investment in the lease.
- Finance income is recognized based on a pattern reflecting a constant periodic rate of
return.
- In operating leases, assets remain on the lessor's balance sheet and income is recognized
on a straight-line basis.
For large ticket leasing companies, the main impact is enhanced disclosures about how risks
are managed in the lease portfolio. Transition to the new models is administratively less
complex for lessors compared to lessees.
Impact of Changes
Key implications of the new standards include:
- Balance sheet increases significantly as majority of operating leases are brought on-
balance sheet as right-of-use assets and liabilities.
- Higher leased assets, liabilities and corresponding interest and depreciation expenses
impact financial ratios and loan covenants compliance.
- Complex transition requirements for prospective or retrospective application depending on
practical expedients used.
- Enhanced lease disclosures improve transparency about quantity, variability and liquidity of
cash outflows from leasing activities.
- Implementation demands operational change and IT upgrades to capture additional lease
data elements for accounting and reporting.
- Disclosure of significant judgments and assumptions applied increases financial reporting
risk.
While bringing more transparency and consistency, transition and ongoing application
require careful planning and resource investment from companies.
Transition
Entities have a choice to apply the new standards on a modified retrospective basis with
optional transitional reliefs, or with full retrospective application. Key optional reliefs are:
- Not to reassess whether expired contracts are leases or contain leases.
- Apply a single discount rate to portfolios of leases with similar characteristics.
- Rely on prior assessments on onerous lease contracts.
- Use hindsight in determining the lease term if the contract contains options to extend or
terminate.
- Exclude initial direct costs from measurement of right-of-use assets on transition date.
- Elect to not separate lease and non-lease components of contracts.
Transitional reliefs simplify the process. Differences in amount and timing of adjustments
pose challenges for investors in understanding financial impacts.
Disclosure Requirements
Comprehensive disclosures are mandated to provide transparency into complex leasing
activities. Key requirements include:
- Amount, timing and uncertainty of cash flows arising from leases.
- Reconciliation of operating lease commitments to lease liabilities on adoption.
- Weighted average discount rates, remaining lease term by class of underlying asset.
- Basis for judgment exercised in accounting for leases as finance or operating.
- Impacts of leases not yet commenced to which the entity is committed.
- Carrying amounts of right-of-use assets by class of underlying asset.
- Desegregation of interest expense on lease liabilities.
- Information on sale-and-leaseback transactions.
Robust disclosures enable users to understand economic effects and risks arising from
leases. However, extracting this volume of data requires significant effort.
Conclusion
The new lease accounting standards aim to remove inconsistencies and provide
transparency into leasing activities. While the principles align worldwide reporting, transition
and ongoing application involve practical challenges. Extensive disclosures enhance
understanding for users. Overall, the enhanced balance sheet recognition and comparability
of leased assets and liabilities to owned assets provide useful information. With judicious
application of judgments and reliefs, entities can smoothly adopt the new lease accounting
framework.
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