Accounting for Leases: A Comparative Analysis of IFRS 16
and ASC 842
Introduction
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
Leasing has become a major form of financing for many companies across
the world. It allows companies to acquire the use of assets without having to
invest large amounts of capital upfront. Under previous accounting standards
such as IAS 17 and ASC 840, a key distinction was made between operating
leases and finance (capital) leases. Operating leases were treated similar to
rentals where lease payments were recognized as expense on a straight-line
basis over the lease term. In contrast, finance leases were treated similar to
purchases where the assets and corresponding liabilities were recognized on
the balance sheet.
However, this operating/finance lease distinction provided opportunities for
structuring transactions to achieve off-balance sheet treatment which often
did not faithfully represent the economics of the transactions. The new lease
accounting standards IFRS 16 issued by the International Accounting
Standards Board (IASB) and ASC 842 issued by the Financial Accounting
Standards Board (FASB) aim to address this issue by bringing most leases
onto the balance sheet for lessees (IASB, 2019; FASB, 2020).
This report provides a comparative analysis of the key requirements of IFRS
16 and ASC 842 on lease accounting. It examines the scope and definition of
a lease under both standards. The recognition, measurement and
presentation requirements for lessees and lessors are then analyzed and
compared. Finally, the transition requirements and effective dates of IFRS 16
and ASC 842 are also discussed.
Scope and Definition of a Lease
Both IFRS 16 and ASC 842 define a lease as "a contract, or part of a contract,
that conveys the right to control the use of an identified asset for a period of
time in exchange for consideration" (IASB, 2016; FASB, 2016). The key
aspects of this definition are:
- Identified asset - This could be explicitly or implicitly specified and must be
physically distinct or represent substantially all of the capacity of a physically
distinct asset.
- Right to control the use - The customer has the right to obtain substantially
all of the economic benefits from use of the asset and direct how and for
what purpose the asset is used over the period of use.
- Period of use - The non-cancellable period plus periods covered by an
option to extend if lessee is reasonably certain to exercise it, or an option to
terminate if lessee is reasonably certain not to exercise it.
Both standards provide guidance to determine whether a contract contains a
lease. Certain scope exceptions exist including leases to explore for or use
minerals, oil, natural gas and similar non-regenerative resources, licenses of
intellectual property, and service concession arrangements.
Recognition and Measurement for Lessees
Under both IFRS 16 and ASC 842, a lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset, and a
lease liability representing its obligation to make lease payments.
Right-of-use Asset
The right-of-use asset is initially measured at cost comprising:
- The amount of initial measurement of lease liability
- Any lease payments made at or before commencement date less any lease
incentives received
- Any initial direct costs
- Dismantling costs
Subsequent accounting follows the cost model or revaluation model as
applicable for property, plant and equipment. The right-of-use asset is
depreciated over the shorter of asset's useful life or lease term on a straight-
line basis.
Lease Liability
The lease liability is initially measured at the present value of unpaid lease
payments discounted using lessee's incremental borrowing rate if interest
rate implicit in lease cannot be readily determined.
Lease payments include fixed payments, variable payments based on index
or rates, amounts expected to be paid under residual value guarantees,
exercise price of purchase options if exercise is reasonably certain and
payments of penalties for terminating lease if term reflects exercise.
After initial measurement, interest is recorded on the lease liability in each
period while lease payments reduce the liability. Remeasurement occurs if
there is change in future lease payments.
Presentation Requirements
IFRS 16 requires right-of-use assets to be presented separately from owned
assets either as part of property, plant and equipment or as a separate line
item. Lease liabilities are presented as either a separate line item or
combined with other financial liabilities.
ASC 842 does not specify balance sheet presentation but requires separate
presentation of maturities of lease liabilities in notes.
Recognition and Measurement for Lessors
IFRS 16 and ASC 842 retain largely the same classification of leases as
operating and finance (sales-type/direct financing) leases for lessors.
However, some differences exist:
Operating Leases
IFRS 16 - Lessor continues to recognize underlying asset and lease payments
are recognized as income over lease term on either straight-line or other
systematic basis.
ASC 842 - Lessor classifies lease as a Type A operating lease if underlying
asset is expected to be held for substantially all of its economic life. Income
recognition remains unchanged from ASC 840. Otherwise it is a Type B
operating lease where manufacturing or dealer lessors recognize selling
profit at commencement with income recognition over lease term.
Finance Leases
Both standards require a lease receivable to be recognized for the net
investment in lease, measured at an amount equal to net investment in
lease.
IFRS 16 requires finance income to be recognized based on a pattern
reflecting a constant periodic rate of return.
ASC 842 requires effective interest method to be applied for direct financing
leases and sales-type leases except for leveraged leases.
Presentation Requirements
IFRS 16 requires separate presentation of right to receive lease payments for
finance leases and underlying assets for operating leases either as separate
line items or including in respective asset classes.
ASC 842 does not specify balance sheet presentation of lessor but requires
disclosure of significant components of net investment in finance leases.
Transition Requirements
Both standards allow either full retrospective approach or modified
retrospective approach on transition. Some practical expedients are also
available:
- Not reassess whether expired/existing contracts contain leases
- Grandfather determination of lease classification
- Exclude initial direct costs from measurement of right-of-use assets
- Use hindsight in determining lease term
IFRS 16
- Can elect to apply either approaches lease-by-lease or by class of
underlying asset.
ASC 842
- Only allows modified retrospective approach applied at effective date
without restating comparative periods presented.
Effective Date
IFRS 16 is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted if IFRS 15 is also early adopted.
ASC 842 is effective for annual periods beginning after December 15, 2018
for public business entities. For all other entities, effective for annual periods
beginning after December 15, 2020 and interim periods within fiscal years
beginning after December 15, 2021. Early adoption is permitted.
Conclusion
In conclusion, both IFRS 16 and ASC 842 aim at bringing most lease
contracts onto balance sheets of lessees to provide a more comprehensive
representation of companies’ assets and liabilities. While the accounting
models for lessees and lessors are broadly similar, some differences exist in
the details of recognition, measurement and presentation requirements
between the two standards. The transition to these new lease accounting
standards represents a major change for many entities with significant
implications for their financial position and performance. Proper
understanding and timely implementation of both IFRS 16 and ASC 842 is
critical for financial statement preparers and users.
