1 Best Read All IFRS vs US GAAP Leases

IFRS vs US GAAP Leases

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In 2016, the IASB and FASB issued new standards addressing the accounting for leases (IFRS 16 and ASC 842, respectively). The prior leasing standards (IAS 17 and ASC 840, respectively) were in practice significantly converged. The primary objective of the new standards was to require lessees to recognize assets and liabilities on the balance sheet for most lease contracts. Although the boards accomplished this goal, they did so in different ways.

Thus, while the boards remained largely converged with respect to scope and initial measurement, they significantly diverged on subsequent measurement for lessees: the IASB requires a single measurement model (akin to that for finance leases under U.S. GAAP) while the FASB maintains a two-class system (operating and finance lease classifications).

In addition, while certain presentation and disclosure requirements in IFRS 16 are similar to those in ASC 842, there are also certain differences (quantitative and qualitative) in this area. Other differences between IFRS 16 and ASC 842 may also arise as a result of differences between IFRS Standards and U.S. GAAP in other standards, including those related to (1) impairment of financial instruments and long-lived assets other than goodwill and (2) the accounting for investment properties.

The Lease Standards, effective 2019, requires that leases greater than 12 months are reported on Balance Sheets as Right of Use Assets under both US GAAP and IFRS. US GAAP distinguishes between Operating and Finance Leases (both are recognized on the Balance Sheet), while IFRS does not (any more).

Standards Reference

US GAAP1

IFRS2

ASC 842 Leases

IFRS 16 Leases

Note

The following discussion captures a number of the more significant GAAP differences under both the standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

Overview

US GAAP

IFRS

The leases Codification Topic is currently effective for public entities, and for annual periods beginning after 15 December 2020 for non-public entities. Early adoption is permitted.

IFRS 16, the leases standard, is effective for annual periods beginning on or after 1 January 2019.

The leases Codification Topic applies to leases of property, plant and equipment. Unlike IFRS Standards, the scope excludes leases of inventory, leases of assets under construction and all leases of intangible assets.

This leases standard applies to leases of property, plant and equipment and other assets, with limited exclusions.

Like IFRS Standards, a contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Unlike IFRS Standards, there is a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases. Classification is determined by pass/fail tests intended to determine whether the lessee obtains control of the use of the underlying asset as a result of the lease. Classification is made at commencement of the lease and is reassessed only if there is a lease modification and that modification is not accounted for as a separate lease. Like IFRS Standards, the on-balance sheet accounting does not apply to short-term leases for which the lessee elects the recognition exemption; however, the definition of ‘short-term’ differs in some respects from IFRS Standards. Unlike IFRS Standards, there is no exemption for leases of low-value assets.

Lessees apply a single on-balance sheet lease accounting model, except for leases to which they elect to apply the recognition exemptions for short-term leases or leases of low-value assets.

Like IFRS Standards, a lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make future lease payments.

A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make future lease payments.

Like IFRS Standards, after initial recognition, a lessee measures the lease liability at amortised cost using the effective interest method. The lease liability is also remeasured to reflect lease modifications and changes in the lease payments, like IFRS Standards; however, unlike IFRS Standards, this does not include changes caused by a change in an index or rate unless the lease liability is remeasured for another reason.

After initial recognition, a lessee measures the lease liability at amortised cost using the effective interest method. The lease liability is also remeasured to reflect lease modifications and changes in the lease payments, including changes caused by a change in an index or rate.

For a finance lease, a lessee measures the right-of-use asset at cost less accumulated amortisation and accumulated impairment losses, like IFRS Standards. For an operating lease, unless the right-of-use asset has been impaired, a lessee amortises the right-of-use asset as a balancing amount that together with accretion on the lease liability generally produces straight-line total lease expense, unlike IFRS Standards. Unlike IFRS Standards, a lessee cannot revalue right-of-use assets, and there is no alternative measurement model for leases of investment property.

A lessee measures the right-of-use asset at cost less accumulated depreciation and accumulated impairment losses, except when it applies the alternative measurement models for revalued assets and investment property.

Like IFRS Standards, lessors classify leases as either finance or operating leases. However, unlike IFRS Standards, finance leases are further classified as sales-type leases or direct financing leases.

Lessors classify leases as either finance or operating leases.

Lease classification by lessors is made at commencement of the lease, unlike IFRS Standards. In addition, unlike IFRS Standards, the classification is determined by a series of pass/fail tests intended to determine whether the lessee obtains control of the use of the underlying asset as a result of the lease. Like IFRS Standards, classification is reassessed only if there is a lease modification and that modification is not accounted for as a separate lease.

Lease classification by lessors is made at inception of the lease and is reassessed only if there is a lease modification and that modification is not accounted for as a separate lease. The classification depends on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred, based on the substance of the arrangement.

Like IFRS Standards, under a sales-type or direct financing lease, a lessor derecognises the underlying asset and recognises a net investment in the lease. Like IFRS Standards, a lessor recognises the selling margin in a sales-type lease by applying its normal accounting policy for outright sales.

Unlike IFRS Standards, any selling margin in a direct financing lease is recognised over the lease term. In addition, unlike IFRS Standards, there is specific guidance on collectability that may affect timing of recognition of income for a sales-type lease and require classification of a lease as operating that would otherwise be classified as direct financing.

Under a finance lease, a lessor derecognises the underlying asset and recognises a net investment in the lease. A manufacturer or dealer lessor recognises the selling margin in a finance lease by applying its normal accounting policy for outright sales.

Like IFRS Standards, under an operating lease, the lessor recognises the lease payments as income over the lease term, generally on a straight-line basis. Like IFRS Standards, the lessor recognises the underlying asset in its statement of financial position. Unlike IFRS Standards, there is specific guidance on collectability that may result in operating lease income being recognised on a cash basis (i.e. rather than on a straight-line basis).

Under an operating lease, the lessor recognises the lease payments as income over the lease term, generally on a straight-line basis. The lessor recognises the underlying asset in its statement of financial position.

There is specific guidance on accounting for lease modifications by lessees and lessors, which differs in some respects from IFRS Standards.

There is specific guidance on accounting for lease modifications by lessees and lessors.

Like IFRS Standards, in a sale-leaseback transaction the seller-lessee first determines if the buyer-lessor obtains control of the asset based on the revenue Codification Topic (see chapter 4.2). However, unlike IFRS Standards, additional considerations apply if there is a seller-lessee repurchase option or if the leaseback would be classified as a finance lease by the seller-lessee (sales-type lease by the buyer-lessor). Like IFRS Standards, if the transaction does not qualify for sale accounting, then it is accounted for as a financing.

In a sale-and-leaseback transaction, the seller-lessee first determines if the buyer-lessor obtains control of the asset based on the revenue standard (see chapter 4.2). If not, then the transaction is accounted for as a financing.

Like IFRS Standards, in a sub-lease transaction, the intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. Unlike IFRS Standards, an intermediate lessor classifies a sub-lease by reference to the underlying asset.

In a sub-lease transaction, the intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. An intermediate lessor classifies a sub-lease by reference to the right-of-use asset arising from the head lease.

The leases Codification Topic is currently effective for public entities, and is effective for non-public entities in annual periods beginning after 15 December 2020 (see appendix). Early adoption is permitted. [842-10-65-1, ASU 2019-10]

IFRS 16, the leases standard, is effective for annual periods beginning on or after 1 January 2019. [IFRS 16.C1]

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Scope comparisons

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US GAAP

IFRS

The leases Codification Topic deals with all leases, including leases of right-of-use assets in a sub-lease, except for:

  • leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, like IFRS Standards;
  • leases of biological assets held by a lessee, like IFRS Standards; including leases of timber, unlike IFRS Standards;
  • service concession arrangements, like IFRS Standards;
  • leases of inventory, unlike IFRS Standards; and
  • leases of assets under construction when the lessee does not control the asset before the lease commencement date, unlike IFRS Standards. [842-10-15-1, 853-10-25-2]

The standard deals with all leases, including leases of right-of-use assets in a sub-lease, except for:

  • leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources (see Extractive activities);
  • leases of biological assets held by a lessee (see Biological assets);
  • service concession arrangements (see Service concession arrangements);
  • licences of intellectual property granted by a lessor in the scope of the revenue standard (see Revenue from contracts with customers); and
  • rights held by a lessee under licensing agreements in the scope of the standard on intangible assets for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. [IFRS 16.3]

Unlike IFRS Standards, all leases of intangible assets are excluded from the scope of the leases Codification Topic. [842-10-15-1]

A lessee may, but is not required to, apply the leases standard to leases of intangible assets other than the rights described in the final bullet point above. [IFRS 16.4]

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Identification of a lease

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US GAAP

IFRS

Like IFRS Standards, a lease is 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. Like IFRS Standards, an assessment of whether a contract is, or contains, a lease is made at inception of the contract and if its terms and conditions subsequently change. [842-10-15-2 – 15-3, 15-6]

A lease is 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. An assessment of whether a contract is, or contains, a lease is made at inception of the contract and if its terms and conditions subsequently change. [IFRS 16.9, IFRS 16.11, Definitions]

Like IFRS Standards, a contract relates to an identified asset if:

  • the asset is specified, either explicitly or implicitly;
  • the asset is physically distinct or the customer has the right to receive substantially all of the capacity of the asset; and
  • the supplier has no substantive substitution right throughout the period of use. [842-10-15-4, 15-9, 15-16]

A contract relates to an identified asset if:

  • the asset is specified, either explicitly or implicitly;
  • the asset is physically distinct or the customer has the right to receive substantially all of the capacity of the asset; and
  • the supplier has no substantive substitution right throughout the period of use. [IFRS 16.B9, IFRS 16.B13, IFRS 16.B20]

Like IFRS Standards, a contract conveys the right to control the use of an identified asset if the customer has the following rights throughout the period of use:

  • to obtain substantially all of the economic benefits from using the identified asset; and
  • to direct the use of the identified asset. [842-10-15-4]

A contract conveys the right to control the use of an identified asset if the customer has the following rights throughout the period of use:

  • to obtain substantially all of the economic benefits from using the identified asset; and
  • to direct the use of the identified asset. [IFRS 16.B9]

Like IFRS Standards, a customer has the right to direct the use of an identified asset only when:

  • the customer has the right to direct how and for what purpose the asset is used throughout the period of use; or
  • all relevant decisions about how and for what purpose the asset is used are predetermined and:
    • the customer has the right to operate the asset (or to direct others to operate the asset in a manner that it determines) throughout the period of use, without the supplier having the right to change those operating instructions; or
    • the customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use. [842-10-15-20, 15-25]

A customer has the right to direct the use of an identified asset only when:

  • the customer has the right to direct how and for what purpose the asset is used throughout the period of use; or
  • all relevant decisions about how and for what purpose the asset is used are predetermined and:
    • the customer has the right to operate the asset (or to direct others to operate the asset in a manner that it determines) throughout the period of use, without the supplier having the right to change those operating instructions; or
    • the customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use. [IFRS 16.B24, B26]

When an arrangement provides an operator with a right to place a pipeline in a specified underground space for a specific term in exchange for consideration, the following analyses are acceptable under US GAAP:

  • the arrangement is in the scope of the leases Codification Topic following the same analysis as IFRS Standards; or
  • the land-use rights are analogous to air-use rights (a contract-based intangible asset) and therefore are outside the scope of the leases Codification Topic.

An arrangement providing an operator with a right to place a pipeline in a specified underground space for a specific term in exchange for consideration contains a lease if:

  • the underground space is physically distinct from the remainder of the land and the land owner does not have substantive substitution rights;
  • the operator has exclusive use of the specified underground space; and
  • the relevant decisions about how and for what purpose the asset is used are predetermined in the contract and the operator has the right to operate the asset by performing inspection, repairs and maintenance work.

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Lease and non-lease components

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US GAAP

IFRS

Like IFRS Standards, if a contract is or contains a lease, then both the lessee and lessor account for each lease component separately from non-lease components. [842-10-15-28, 15-30]

If a contract is or contains a lease, then the lessee and lessor account for each lease component separately from non-lease components. [IFRS 16.12, IFRS 16.B32–B33]

Subject to the practical expedient below, a lessee allocates the consideration in the contract to lease and non-lease components based on relative stand-alone prices, like IFRS Standards. Like IFRS Standards, if an observable stand-alone price is not readily available, then the lessee makes an estimate, maximising the use of observable information. Unlike IFRS Standards, US GAAP explicitly allows a residual estimation approach if the stand-alone price for a component is highly variable or uncertain. [842-10-15-33]

Subject to the practical expedient below, a lessee allocates the consideration in the contract to lease and non-lease components based on relative stand-alone prices. If an observable stand-alone price is not readily available, then the lessee makes an estimate, maximising the use of observable information. IFRS Standards do not provide specific guidance for lessees on suitable methods for estimating the stand-alone selling price. [IFRS 16.13–14]

Like IFRS Standards, a lessee may elect, by class of underlying asset, not to separate lease components from any associated non-lease components and instead account for them as a single lease component. [842-10-15-37]

A lessee may elect, by class of underlying asset, not to separate lease components from any associated non-lease components and instead account for them as a single lease component. [IFRS 16.15]

Unless the practical expedient discussed below is elected, a lessor separates lease and non-lease components and allocates the consideration in the contract under the requirements of the revenue Codification Topic, like IFRS Standards – i.e. according to the stand-alone selling prices of the goods and services included in each component (see IFRS vs US GAAP Revenue from contracts with customers). [842-10-15-38]

Unlike IFRS Standards, a lessor may elect, by class of underlying asset, not to separate lease components from any associated non-lease components and instead account for them as a single component if:

  • the non-lease component(s) would otherwise be accounted for under the revenue Codification Topic;
  • the timing and pattern of transfer for the lease component and non-lease component(s) are the same; and
  • the lease component, if it were accounted for separately, would be classified as an operating lease. [842-10-15-42A]

A lessor always separates lease and non-lease components and allocates the consideration in the contract under the requirements of the revenue standard – i.e. according to the stand-alone selling prices of the goods and services included in each component (see IFRS vs US GAAP Revenue from contracts with customers).

IFRS vs US GAAP Leases

Like IFRS Standards, a lessor allocates variable consideration under the requirements of the revenue Codification Topic – i.e. entirely to one or more, but not all, performance obligations in the contract if specific criteria are met. Unlike IFRS Standards, a lessee always allocates variable payments arising from a lease contract on a relative stand-alone price basis. [842-10-15-33, 15-38]

A lessor allocates variable consideration under the requirements of the revenue standard – i.e. entirely to one or more, but not all, performance obligations in the contract if specific criteria are met. In the absence of specific guidance in the leases standard, it appears that it is acceptable for a lessee to apply guidance similar to that applied by lessors from the revenue standard when allocating variable payments in a lease contract that contains multiple lease and/or non-lease components. [IFRS 15.85, IFRS 16.17]

Something else -   IFRS vs US GAAP Taxation

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Definition of Lease term

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US GAAP

IFRS

Like IFRS Standards, the lease term is the non-cancellable period of the lease, together with:

  • optional renewable periods if the lessee is reasonably certain to extend; and
  • periods after an optional termination date if the lessee is reasonably certain not to terminate at that date. [842-10-30-1, 55-24]

Sometimes, the terms of a lease are enforceable only during a specified period. In this situation, the ‘lease term’ is the non-cancellable period of the lease, together with:

  • optional renewable periods if the lessee is reasonably certain to extend; and
  • periods after an optional termination date if the lessee is reasonably certain not to terminate at that date. [IFRS 16.18]

When determining the lease term, an entity considers all relevant economic factors, like IFRS Standards. [842-10-55-26]

When determining the lease term, an entity considers all relevant facts and circumstances that create an economic incentive making it reasonably certain that the lessee will exercise an option to renew or forfeit an option to terminate early. [IFRS 16.B37]

Like IFRS Standards, the lease term includes periods during which the lessor has the unilateral right to terminate the lease, because the lessor can enforce its rights under the agreement during that period. [842-10-30-1, 55-24]

The lease term includes periods during which the lessor has the unilateral right to terminate the lease, because the lessor can enforce its rights under the agreement during that period. [IFRS 16.B35]

Like IFRS Standards, a lease is no longer ‘enforceable’ (i.e. the lease term ends) when both the lessee and lessor have the right to terminate it without agreement from the other party with no more than an insignificant penalty. [842-10-55-23]

A lease is no longer ‘enforceable’ (i.e. the lease term ends) when both the lessee and lessor have the right to terminate it without agreement from the other party with no more than an insignificant penalty. [IFRS 16.B34]

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Definition of lease payments

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US GAAP

IFRS

Like IFRS Standards, both the lessee and the lessor include the following in the lease payments:

  • fixed payments (including in-substance fixed payments) less any lease incentives paid or payable to the lessee;
  • variable lease payments that depend on an index or a rate;
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
  • payments of penalties for terminating the lease, if the lease term reflects the assessment that the lessee will exercise an option to terminate the lease. [842-10-30-5]

Both the lessee and the lessor include the following in the lease payments:

  • fixed payments (including in-substance fixed payments) less any lease incentives;
  • variable lease payments that depend on an index or a rate;
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
  • payments of penalties for terminating the lease, if the lease term reflects the assessment that the lessee will exercise an option to terminate the lease. [IFRS 16.Definitions, IFRS16.27, IFRS 16.70]

Like IFRS Standards, variable payments that depend on performance or use of the underlying asset are not included in the lease payments. Such variable payments are excluded from the initial measurement of the lease liability and right-of-use asset. [842-10-30-5, 30-6(a), 842-20-25-5(b), 30-5, ASU 2016-12.BC209]

Variable payments that depend on performance or use of the underlying asset are not included in the lease payments. Such variable payments are excluded from the initial measurement of the lease liability and right-of-use asset. [IFRS 16.Definitions, IFRS 16,24, IFRS 16.27, IFRS 16.38(b), IFRS 16.BC169]

If a lessee provides a residual value guarantee, then it includes in the lease payments the amount probable of being owed under that guarantee, like IFRS Standards. [842-10-30-5]

If a lessee provides a residual value guarantee, then it includes in the lease payments the amount that it expects to pay under that guarantee. [IFRS 16.Definitions, IFRS 16.27]

Like IFRS Standards, a lessee determines whether it is reasonably certain that it will exercise a purchase option using an approach similar to the one that it uses to assess whether it expects to exercise a renewal option (see above). [842-10-30-5]

A lessee determines whether it is reasonably certain that it will exercise a purchase option using an approach similar to the one that it uses to assess whether it expects to exercise a renewal option (see above). [IFRS 16.27(d), IFRS 16.B37]

Unlike IFRS Standards, for the lessor, lease payments exclude any residual value guarantees (whether provided by the lessee or by another unrelated third party). However, the residual value guarantees are included in the calculation of the lease receivable for sales-type and direct financing leases (see below). This results in similar outcomes in how a residual value guarantee affects a lessor’s net investment in a lease under IFRS Standards and US GAAP. [842-10-30-5, 842-30-30-1 – 30-2]

For the lessor, lease payments also include any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee. [IFRS 16.Definitions, IFRS 16.70]

In our view, a lessee’s accounting for taxes relating to the underlying asset (e.g. property or sales taxes, including value-added tax (VAT)) is driven by whether the lessee or the lessor is the primary obligor for the tax and whether the tax is incurred at or before lease commencement or over the lease term.

  • If the lessor is the primary obligor for the tax then, unlike IFRS Standards, such taxes are part of the lessee’s consideration in the contract only if they are incurred at or before lease commencement.
  • If the lessee is the primary obligor for the tax, then such taxes are not part of the lessee’s lease accounting, like IFRS Standards; however, unlike IFRS Standards, there is no similar guidance under US GAAP on levies and the accounting outcome may differ from IFRS Standards.

Real estate is often subject to property taxes. It appears that the lessee’s accounting for property tax is driven by the identity of the statutory obligor.

  • If the lessor has the statutory obligation to pay the tax and requires the lessee to reimburse it for the tax paid, then we believe that the lessee should account for the reimbursement as part of the total consideration in the contract.
  • If the lessee has the statutory obligation to pay the tax, then we believe that the lessee should account for it under the interpretation on levies (see Provisions).

Unlike IFRS Standards, a lessor’s accounting for sales and other similar taxes (including VAT) first depends on whether the lessor elects the sales and other similar taxes practical expedient (which is available only to lessors). If the lessor elects the practical expedient, then the tax and related payments are presented net in the lessor’s income statement.

Unlike IFRS Standards, when the lessor does not elect the sales and other similar taxes practical expedient, and for taxes other than sales and other similar taxes (e.g. property taxes), the accounting depends on who remits the tax payment(s) to the taxing authority.

  • If the lessee remits payments, then the tax and related payments should be presented net in the lessor’s income statement.
  • If the lessor remits payments, then the tax and related payments should be presented gross in the lessor’s income statement – i.e. as its own cost and income. If the tax is incurred at or before lease commencement:
    • for operating leases, the tax should be capitalised to the underlying asset; and
    • for sales-type and direct financing leases, non-manufacturer or dealer lessors should capitalise the tax as part of their net investment in the lease, whereas manufacturers or dealer lessors should expense the tax at lease commencement.

There is no practical expedient for value-added tax (VAT) or similar taxes for lessees or lessors under IFRS Standards. It appears that VAT that is levied on the lessee and collected by the lessor (who is acting as an agent for the tax authority) is not a lease payment and should be accounted for under the interpretation on levies, whereas a lessee’s payment of VAT that is levied on the lessor is a lease payment.

IFRS vs US GAAP Leases

Unlike IFRS Standards, US GAAP is explicit that lease payments include payments by the lessee to the owners of a special purpose entity for structuring the transaction. [842-10-30-5]

There is no explicit guidance on payments by the lessee to the owners of a special purpose entity for structuring the transaction.

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Definition of discount rate

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US GAAP

IFRS

The interest rate implicit in the lease is the rate that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of:

  • the fair value of the underlying asset, like IFRS Standards; and
  • only initial direct costs of the lessor that are deferred; although this wording differs from IFRS Standards, the overall accounting for initial direct costs is the same (see below). [842 Glossary]

The interest rate implicit in the lease is the rate that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of:

  • the fair value of the underlying asset; and
  • any initial direct costs of the lessor. [IFRS 16.Definitions]

The lessee’s incremental borrowing rate is the rate that a lessee would have to pay to borrow, on a collateralised basis and over a similar term, an amount equal to the lease payments in a similar economic environment, like IFRS Standards. [842 Glossary]

The lessee’s incremental borrowing rate is the rate that a lessee would have to pay on the commencement date of the lease for a loan of a similar term, and with a similar security, to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.[IFRS 16.Definitions]

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Definition of Initial direct costs

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US GAAP

IFRS

Like IFRS Standards, initial direct costs are incremental costs of obtaining a lease that would not otherwise have been incurred. However, they exclude such costs incurred in connection with sales-type leases that give rise to manufacturer/ dealer profit or loss (i.e. where the fair value of the asset differs from its carrying amount). In general, the IFRS Standards identification of costs by manufacturer or dealer lessors in connection with finance leases (see below) results in the same population of costs under IFRS Standards and US GAAP. [842 Glossary, 842-30-25-1(c)]

Initial direct costs are incremental costs of obtaining a lease that would not otherwise have been incurred, except for such costs incurred by manufacturer or dealer lessors in connection with finance leases. [IFRS 16.Definitions]

Like IFRS Standards, initial direct costs include commissions and payments made by a potential lessee to an existing tenant to vacate the property so that the potential lessee can obtain the lease. They exclude the costs that would have been incurred regardless of whether the lease was obtained, including allocations of general overheads, as well as legal fees and internal costs that are not contingent on the origination of a lease, like IFRS Standards. [842-10-30-9 – 30-10]

Initial direct costs include commissions and payments made by a potential lessee to an existing tenant to vacate the property so that the potential lessee can obtain the lease. They exclude allocations of internal overhead costs (e.g. those incurred by a sales and marketing team or a purchase team). Legal fees and other costs that are incremental and directly attributable to negotiating and arranging a lease, including internal costs, are considered initial direct costs only if they are contingent on the origination of a lease. [IFRS 16.Definitions]

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Accounting for leases – Lessor – Classification of a lease

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US GAAP

IFRS

Unlike IFRS Standards, a lessor classifies each lease as either an operating lease, sales-type lease or direct financing lease. [842-10-25-2 – 25-3]

A lessor classifies each lease as either an operating lease or a finance lease. [IFRS 16.61, IFRS 16.B53]

The population of ‘sales-type’ and ‘direct financing’ leases is generally equivalent to the population of finance leases under IFRS Standards. However, US GAAP distinguishes between leases that:

  • effectively transfer control – i.e. the ability to direct the use and obtain substantially the remaining benefits of the underlying asset to the lessee (sales-type leases); and
  • transfer substantially all of the risks and rewards incidental to ownership of an underlying asset to the lessee and one or more third parties unrelated to the lessor (direct financing leases).

An ‘operating lease’ is a lease other than a sales-type or direct financing lease, like IFRS Standards. [842-10-25-2 – 25-3]

Unlike IFRS Standards, when title to the asset transfers by the end of the lease term, the lease is a sales-type lease. [842-10-25-2]

A ‘finance lease’ is a lease that transfers substantially all of the risks and rewards incidental to ownership of an underlying asset; title to the asset may or may not transfer under such a lease. An ‘operating lease’ is a lease other than a finance lease. [IFRS 16.62, 65]

IFRS vs US GAAP Leases

Unlike IFRS Standards, the classification of a lease is determined at its commencement. Like IFRS Standards, the classification is not revised unless the lease is modified and that modification is not accounted for as a separate lease (see below). [842-10-25-1]

The classification of a lease is determined at its inception and is not revised unless the lease is modified and that modification is not accounted for as a separate lease (see below). [IFRS 16.66]

Lessors have to determine which of two types of finance lease an arrangement is: sales-type or direct financing. The differences between the accounting for these leases under IFRS Standards and US GAAP are discussed below. [842-10-25-2 – 25-3]

IFRS Standards does not have different types of finance leases. However, there is specific guidance for manufacturer or dealer lessors (see below). [IFRS 16.69, 71]

Accounting for leases – Lessor – IFRS vs US GAAP Finance lease

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Criteria for a sales-type or direct financing lease (US GAAP) / Indicators of a finance lease (IFRS)

US GAAP

IFRS

The criteria for determining whether a lease is a sales-type lease are generally the same as the indicators of a finance lease under IFRS Standards. However, unlike IFRS Standards, the US GAAP criteria function as pass/fail tests and each one is determinative such that a met criterion cannot be overridden by an assessment of other factors or qualitative considerations. Also unlike IFRS Standards, the ‘lease term’ and ‘lease payments’ criteria may be evaluated using bright-line thresholds (see more below). [842-10-25-2 – 25-3, 55-2]

The leases standard includes the following series of indicators that individually or in combination normally lead to classification as a finance lease:

  • the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
  • the lessee holds a purchase option that is considered reasonably certain to be exercised;
  • the lease term is for the major part of the (remaining) economic life of the underlying asset;
  • the present value of the lease payments amounts to substantially all of the fair value of the underlying asset; and
  • the underlying asset is so specialised that only the lessee can use it without major modification. [IFRS 16.63]

Unlike IFRS Standards, in determining whether the lease term is for the major part of the economic life of the underlying asset, a threshold of 75 percent or more of the remaining economic life of the asset may, but is not required to, be used. This criterion does not apply when the asset is at or near the end of its economic life (e.g. within the last 25 percent of its total economic life). [842-10-25-2, 55-2]

However, lease classification is ultimately based on an overall assessment of whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred. [IFRS 16.61, 63, 65]

IFRS Standards do not define what is meant by the ‘major part’ of an asset’s economic life and no quantitative threshold is provided. In our view, although the optional 75 percent approach under US GAAP may be a useful reference point, it does not represent a bright line or automatic cut-off point under IFRS Standards.

Unlike IFRS Standards, in determining whether the present value of the lease payments and any residual value guarantee equals or exceeds ‘substantially all’ of the underlying asset’s fair value, a threshold of 90 percent or more of the asset’s fair value may, but is not required to, be used. [842-10-25-2, 55-2]

IFRS Standards do not define what is meant by ‘substantially all’ and no quantitative threshold is provided. In our view, although the optional 90 percent approach under US GAAP may provide a useful reference point, it does not represent a bright line or automatic cut-off point under IFRS Standards.

Unlike IFRS Standards, if none of the above criteria are met, then the lease is not classified as a sales-type lease and is either a direct financing lease or an operating lease. The lease is classified as a direct financing lease if both of the following criteria are met:

  • the present value of the following equals or exceeds substantially all of the underlying asset’s fair value (see above):
    • the lease payments; and
    • any residual value guarantee (from the lessee or an unrelated third party); and
  • it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. [842-10-25-3, 55-2]

The following are additional indicators that an arrangement may be a finance lease:

  • the lessee can cancel the lease but the lessor’s losses associated with the cancellation are borne by the lessee;
  • gains or losses from fluctuation in the fair value of the residual fall to the lessee; or
  • the lessee can extend the lease at a rent that is substantially lower than the market rent. [IFRS 16.64]

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Land leases

US GAAP

IFRS

A lease of land is classified with reference to the same pass/fail tests as other assets, which differ in some respects from IFRS Standards (see above). Like IFRS Standards, the fact that land normally has an indefinite economic life will influence the analysis; however, unlike IFRS Standards, that influence only extends to the ‘lease term’ criterion – it does not factor into any overriding assessment of a principle as it does under IFRS Standards.

A lease of land is classified as an operating or finance lease with reference to the general indicators used for lease classification (see above). In determining the lease classification, an important consideration is that land normally has an indefinite economic life. However, the fact that the lease term is normally shorter than the economic life of the land does not necessarily mean that a lease of land is always an operating lease; the other classification requirements are also considered. Ultimately, the lease classification is based on an overall assessment of whether substantially all of the risks and rewards incidental to ownership of the asset have been transferred from the lessor to the lessee. [IFRS 16.B55]

Something else -   Calculations IFRS 16 Leases

Classification issues related to land

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IFRS vs US GAAP Land and building leases

US GAAP

IFRS

For leases that include a land element, the right to use the land is considered a separate lease component unless the accounting effect of separately accounting for the land element would be ‘insignificant’ (e.g. lease classification would not differ for either element or the amount that would be allocated to the land component would be insignificant), like IFRS Standards. [842-10-15-29]

When a lease includes both land and a building, a lessor assesses the classification of the two leases separately: a lease of the land and a lease of the building, unless the value of the land at inception of the lease is immaterial or it is clear that both elements are either finance leases or operating leases. [IFRS 16.B55–B57]

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Sales-type leases / Manufacturer or dealer lessors

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US GAAP

IFRS

Initially, if collectability of the lease payments and any amount necessary to satisfy a residual value guarantee is probable (unlike IFRS Standards), then the sales-type lessor derecognises the underlying asset and recognises a net investment in the lease, which comprises, like IFRS Standards, the present value (using the rate implicit in the lease) of:

  • the lease payments as defined under US GAAP (see above);
  • any portion of the estimated residual value at the end of the lease term that is guaranteed either by the lessee or by a third party unrelated to the lessor; and
  • any portion of the estimated residual value at the end of the lease term that is not guaranteed either by the lessee or by a third party unrelated to the lessor. [842-30-30-1]

Initially, the manufacturer or dealer lessor derecognises the underlying asset and recognises a finance lease receivable at an amount equal to its net investment in the lease, which comprises the present value (using the rate implicit in the lease) of:

Like IFRS Standards, a sales-type lease results in two types of income: initial selling profit, and finance income over the lease term. Unlike IFRS Standards, a sales-type lease is a lease that meets specific criteria (see above). [842-30-25-1 – 25-3]

A finance lease of an asset by a manufacturer or dealer results in two types of income: initial selling profit, and finance income over the lease term. There is no definition of a manufacturer or dealer lessor. [IFRS 16.71–72, 74]

Like IFRS Standards, sales-type lessors recognise the selling margin in profit or loss for the period by applying their normal accounting policy for outright sales. [842-30-25-1]

Manufacturer or dealer lessors recognise the selling margin in profit or loss for the period by applying their normal accounting policy for outright sales. [IFRS 16.71–72]

Initial direct costs are either:

  • expensed at lease commencement (if the fair value of the underlying asset does not equal its carrying amount), like IFRS Standards; or
  • deferred and included in the net investment in the lease (if the fair value of the underlying asset equals its carrying amount), unlike IFRS Standards. [842-30-25-1]

Costs incurred in connection with negotiating and arranging a lease (which are excluded from the definition of initial direct costs – see above) are recognised as an expense in profit or loss when the selling profit is recognised, which is generally at the commencement date of the lease term. [IFRS 16.74]

The sales revenue recognised by the sales-type lessor is the lower of:

  • the fair value of the underlying asset at the commencement date, like IFRS Standards; and
  • the sum of the lease receivable and any lease payments prepaid by the lessee; the lease receivable is discounted using the interest rate implicit in the lease, unlike IFRS Standards. [842-30-30-1, 45-4]

The sales revenue recognised at commencement of the lease term by the manufacturer or dealer lessor is the fair value of the asset or, if it is lower, the present value of the lease payments computed using a market rate of interest. [IFRS 16.71]

Unlike IFRS Standards, there is no adjustment to the selling profit if the lessor quotes below-market interest rates.

If manufacturer or dealer lessors quote below-market interest rates, then selling profit is restricted to the amount that would have been earned if a market rate of interest was charged. [IFRS 16.73]

Like IFRS Standards, lease receipts are allocated between interest income and reduction of the investment so as to produce a constant rate of return on the net investment. [842-30-35-1]

Lease receipts are allocated between finance income and reduction of the investment so as to produce a constant rate of return on the net investment. [IFRS 16.75–76]

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Direct financing leases (US GAAP) / Other finance leases (IFRS)

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US GAAP

IFRS

Unlike IFRS Standards, a direct financing lease is a lease that meets specific criteria (see above). [842-30-25-1 – 25-2]

Other finance leases are those entered into by lessors other than a manufacturer or dealer lessor; there is no specific definition of these leases.

Initially, the lessor derecognises the underlying asset and recognises a net investment in the lease consistent with that of a sales-type lease (see above) except that, unlike IFRS Standards, the net investment in the lease is reduced by the amount of any selling profit on the lease (see the discussion about selling profit/loss below). [842-30-30-1 – 30-2]

Initially, the lessor derecognises the underlying asset and recognises a finance lease receivable at an amount equal to its net investment in the lease, which comprises the same components as for a manufacturer or dealer lessor (see above). [IFRS 16.67–68, IFRS 16.Definitions]

Like IFRS Standards, initial direct costs are included in the measurement of the net investment in the lease because the interest rate implicit in the lease used for discounting the lease receivable and the unguaranteed residual asset takes initial direct costs incurred into consideration. [842 Glossary]

Initial direct costs are included in the measurement of the net investment in the lease because the interest rate implicit in the lease used for discounting the lease payments takes initial direct costs incurred into consideration. [IFRS 16.69]

Unlike IFRS Standards, any selling profit in a direct financing lease is recognised as a reduction in the measurement of the net investment in the lease, and is instead recognised over the lease term. Any selling loss is recognised at lease commencement, like IFRS Standards. [842-30-25-8]

A finance lessor may recognise a gain or loss on commencement of a finance lease. However, only a manufacturer or dealer lessor recognises revenue and cost of sales.

Like IFRS Standards, over the lease term the lessor accrues interest income on the net investment in the lease. Like IFRS Standards, lease receipts are allocated between interest income and reduction of the net investment so as to produce a constant rate of return on the net investment. [842-30-35-1]

Over the lease term, the lessor accrues finance income on the net investment. Lease receipts are allocated between finance income and reduction of the net investment so as to produce a constant rate of return on the net investment. [IFRS 16.75–76]

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Leveraged leases

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US GAAP

IFRS

Like IFRS Standards, the leases Codification Topic does not include the concept of leveraged leases. However, unlike IFRS Standards, leveraged leases under the old leases Codification Topic that have commenced before the effective date of the leases Codification Topic are grandfathered and exempt from applying the new requirements unless they are modified on or after the effective date. [842-10-65-1(z)]

IFRS Standards do not include the concept of leveraged leases. All leases other than those entered into by manufacturers or dealers are accounted for under the requirements for other finance leases (see above).

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Operating leases – Lessor

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US GAAP

IFRS

Like IFRS Standards, a lessor under an operating lease continues to recognise the leased asset in its statement of financial position and accounts for it in the same way as other assets of the same type – i.e. as property, plant and equipment. [842-30-30-4]

A lessor under an operating lease continues to recognise the underlying asset in its statement of financial position, and accounts for it in the same way as other assets of the same type – e.g. property, plant and equipment (see Property plant and equipment). [IFRS 16.88]

Like IFRS Standards, initial direct costs incurred by the lessor are deferred and recognised over the life of the lease. Unlike IFRS Standards, initial direct costs are recognised as a separate asset (not included in the carrying amount of the underlying asset). [842-30-25-10 – 25-11]

Initial direct costs incurred by the lessor are added to the carrying amount of the underlying asset. These initial direct costs are recognised as an expense on the same basis as the lease income. [IFRS 16.83]

Like IFRS Standards, the lessor generally recognises income on a straight-line basis over the lease term. Like IFRS Standards, the lessor recognises lease income using another systematic basis if that is more representative of the pattern in which benefit is expected to be derived from the use of the underlying asset. Unlike IFRS Standards, there is also specific guidance on collectability that may result in operating lease income being recognised on a cash basis until collectability of the lease payments and any amount necessary to satisfy a residual value guarantee becomes probable or specified criteria similar to those in the revenue Codification Topic are met. [842-30-25-11 – 25-13, 606-10-25-7]

The lessor generally recognises income on a straight-line basis over the lease term. The lessor recognises lease income using another systematic basis if that is more representative of the time pattern in which the benefit of the underlying asset is diminished [IFRS 16.8]

Like IFRS Standards, lease incentives granted to the lessee are recognised as reductions of rental income over the term of the lease. [842-30-25-11]

Lease incentives granted to the lessee are recognised as reductions of rental income over the term of the lease. [IFRS 16.81, IFRS 16.Definitions]

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IFRS vs US GAAP Accounting for leases – Lessee

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US GAAP

IFRS

Unlike IFRS Standards, a lessee classifies a lease as a finance lease or an operating lease using the same classification criteria as lessors for a sales-type lease (see above). [842-10-25-2]

Both classifications result in the lessee recognising a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments, like IFRS Standards. However, unlike IFRS Standards, there are differences between the two models relating to subsequent measurement.

A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet at the commencement date, except leases to which it elects to apply the recognition exemptions (see below). A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. [IFRS 16.22]

Recognition exemptions – Lessee

US GAAP

IFRS

Like IFRS Standards, a lessee can elect not to apply the lessee accounting model to leases with a lease term of 12 months or less (i.e. short-term leases). This election is made by class of underlying asset. [842 Glossary, 842-20-25-2 – 25-3]

A lessee can elect not to apply the lessee accounting model to leases with a lease term of 12 months or less (i.e. short-term leases). This election is made by class of underlying asset. [IFRS 16.5(a), 8]

Unlike IFRS Standards, a lease that contains a purchase option can qualify as a short-term lease if the lessee is not reasonably certain to exercise its option to purchase the underlying asset. [842 Glossary]

A lease that contains a purchase option is not a short-term lease. [IFRS 16.Definitions]

Unlike IFRS Standards, there is no exemption for leases for which the underlying asset is of low value.

IFRS vs US GAAP Leases

A lessee can elect not to apply the lessee accounting model to leases for which the underlying asset is of low value when it is new, even if the effect is material in aggregate. This election is made on a lease-by-lease basis. [IFRS 16.5(b), 8]

A lessee does not apply the low-value exemption to a lease of an individual asset in either of the following scenarios:

  • if the underlying asset is highly dependent on, or highly inter-related with, other assets; or
  • if the lessee cannot benefit from the underlying asset on its own or together with other readily available resources, irrespective of the value of that underlying asset.[IFRS 16.B5]

The low-value exemption also does not apply to a head lease of an asset that is sub-leased or that is expected to be sub-leased. [IFRS 16.B7]

If a lessee elects the short-term lease exemption, then it recognises the related lease payments as an expense on a straight-line basis over the lease term, which is more restrictive than IFRS Standards. [842-20-25-2]

If a lessee elects either or both recognition exemptions, then it recognises the related lease payments as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit. [IFRS 16.6]

Unlike IFRS Standards, if the lease term changes such that the remaining lease term does not extend more than 12 months from the end of the previously determined lease term, the lease still qualifies as a short-term lease. [842-20-25-3]

If a lessee elects the short-term lease exemption and the lease term changes subsequently (e.g. because the lessee exercises an option not previously included in the determination of the lease term), then the lease is considered to be a new lease, which may or may not qualify as a short-term lease. [IFRS 16.7]

Initial measurement – Lessee

US GAAP

IFRS

Like IFRS Standards, the lease liability is initially measured at the present value of the future lease payments calculated using the interest rate implicit in the lease if it is readily determinable. If the lessee cannot readily determine that rate, then it uses its incremental borrowing rate, like IFRS Standards. [842-20-30-1 – 30-3]

The lease liability is initially measured at the present value of the future lease payments calculated using the interest rate implicit in the lease if it is readily determinable. If the lessee cannot readily determine that rate, then it uses its incremental borrowing rate. [IFRS 16.26]

Unlike IFRS Standards, non-public entity lessees can elect as an accounting policy to use a risk-free rate. [842-20-30-3]

IFRS Standards do not include guidance for non-public entities. All lessees therefore apply the discount rate guidance in the leases standard.

Like IFRS Standards, a lessee initially measures the right-of-use asset at a cost that includes the following:

  • the amount of the initial measurement of the lease liability (see above);
  • any lease payments made at or before the commencement date, less any lease incentives received; and
  • any initial direct costs incurred by the lessee. [842-20-30-5]

Like IFRS Standards, the initial measurement of the right-of-use asset also includes an estimate of the dismantling, removal and restoration costs to be incurred by the lessee based on the terms and conditions of the lease. However, unlike IFRS Standards, there is no exception when those costs are incurred to produce inventories. Like IFRS Standards, the lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period. [410-20-35-1, 35-8]

A lessee initially measures the right-of-use asset at cost that includes the following:

  • the amount of the initial measurement of the lease liability (see above);
  • any lease payments made at or before the commencement date, less any lease incentives received;
  • any initial direct costs incurred by the lessee; and
  • an estimate of the dismantling, removal and restoration costs to be incurred by the lessee based on the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period. [IFRS 16.23–24]
Subsequent measurement – Lessee

US GAAP

IFRS

Unlike IFRS Standards, there is a dual model for lessee accounting under US GAAP: finance leases and operating leases. Initial recognition and measurement are the samefor both, but there are differences in the subsequent accounting.

There is a single model for lessee accounting.

Finance leases / Single model – Lessee

US GAAP

IFRS

Like IFRS Standards, after initial recognition, the lease liability is measured at amortised cost using the effective interest method. [842-20-35-1]

After initial recognition, the lease liability is measured at amortised cost using the effective interest method. [IFRS 16.36, BC182]

Like IFRS Standards, a lessee remeasures the lease liability to reflect changes in the lease payments by discounting the revised lease payments using:

  • an unchanged discount rate when:
    • the amount probable of being owed under a residual value guarantee changes;
    • the variability of payments is resolved so that they become fixed payments; and
  • a revised discount rate when:
    • the lease term changes; or
    • the assessment of the exercise of a purchase option changes. [842-20-35-5]

Unlike IFRS Standards, a lessee does not remeasure the lease liability for changes in future lease payments arising from changes in an index or rate unless the lease liability is remeasured for another reason – e.g. the lease term changes. Instead, after initial recognition, such variable lease payments are recognised as they are incurred. [842-10-35-5]

A lessee remeasures the lease liability to reflect changes in the lease payments by discounting the revised lease payments using:

  • an unchanged discount rate when:
    • the amount expected to be payable under a residual value guarantee changes;
    • future lease payments change to reflect market rates (e.g. based on a market rent review) or a change in an index or rate (other than in floating interest rates) used to determine lease payments; or
    • the variability of payments is resolved so that they become in-substance fixed payments; and
  • a revised discount rate when:
    • future lease payments change as a result of a change in floating interest rates;
    • the lease term changes; or
    • the assessment of the exercise of a purchase option changes. [IFRS 16.40–43, IFRS 16.B42]

Like IFRS Standards, the right-of-use asset is a non-monetary asset, whereas the lease liability is a monetary liability.

  • Right-of-use assets denominated in a foreign currency are initially measured using the commencement date exchange rate, like IFRS Standards. However, unlike IFRS Standards, a right-of-use asset is remeasured using the exchange rate at the date of the most recent remeasurement for which a reset is required (subject to policy election) or lease modification not accounted for as a separate contract.
  • Like IFRS Standards, the lease liability is remeasured using the current exchange rate. [842-20-55-10, 830-10-45-17 – 45-18]

Like IFRS Standards, translation differences are recognised in profit or loss (see chapter 2.7).

A right-of-use asset is a non-monetary item, whereas a lease liability is a monetary item. Therefore, right-of-use assets are not retranslated after commencement date (unless they are measured at fair value), and lease liabilities are retranslated. Foreign currency exchange differences arising at the reporting date from the retranslation of lease liabilities denominated in a foreign currency are generally recognised in profit or loss (see Foreign currency translation). [IAS 21.23, IFRS 16.BC196–BC199]

Unlike IFRS Standards, a lessee always measures right-of-use assets at cost less accumulated amortisation and accumulated impairment losses. [842-10-35-7]

A lessee subsequently measures right-of-use assets at cost less accumulated depreciation and accumulated impairment losses, unless it applies:

Like IFRS Standards, a lessee adjusts the carrying amount of the right-of-use asset for remeasurement of the lease liability arising from a change in lease payments, unless the carrying amount has already been reduced to zero or the change relates to variable lease payments that do not depend on an index or rate. [842 20 35-4]

A lessee adjusts the carrying amount of the right-of-use asset for remeasurement of the lease liability arising from a change in lease payments, unless the carrying amount has already been reduced to zero or the change relates to variable lease payments that do not depend on an index or rate. [IFRS 16.30(b), IFRS 16.38(b), 39]

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IFRS vs US GAAP Operating leases – Lessee

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US GAAP

IFRS

After lease commencement, a lessee measures the lease liability at the present value of the unpaid lease payments discounted at the discount rate for the lease established at the commencement date. An exception to this general principle occurs when the rate is updated as a result of a lease remeasurement (which is the same as for finance leases) or a modification that is not accounted for as a separate contract (see below). [842-20-35-3]

After lease commencement, a lessee measures the right-of-use asset as follows, unless it has been impaired (see below):

  • lease liability carrying amount;
  • plus unamortised initial direct costs;
  • plus or minus prepaid (accrued) lease payments; and
  • the unamortised balance of lease incentives received. [842-20-35-3]

Alternatively, the carrying amount of an operating lease right-of-use asset can be determined based on the carrying amount of the right-of-use asset less accumulated amortisation. Under this method, amortisation each period is calculated as the difference between the straight-line lease cost for the period (which includes the amortisation of initial direct costs) and the periodic accretion of the lease liability using the effective interest method.

Once a right-of-use asset has been impaired (see below), its post-impairment carrying amount is subsequently amortised on a straight-line basis unless another systematic basis is more representative of the pattern in which the lessee expects to consume the future economic benefits. [842-20-35-10]

IFRS vs US GAAP Leases
Something else -   Identified asset
Amortisation and impairment of right-of-use asset / Depreciation and impairment of right-of-use asset – Lessee

US GAAP

IFRS

A right-of-use asset is amortised as explained above, which differs from IFRS Standards because of the additional operating lease model under US GAAP. In particular, the amortisation of operating lease right-of-use assets does not conform to the amortisation for any owned tangible or intangible assets under US GAAP.

A right-of-use asset is depreciated in accordance with the depreciation requirements for property, plant and equipment (see Property plant and equipment).

Like IFRS Standards, if ownership of the underlying asset is transferred to the lessee, or the lessee is reasonably certain to exercise a purchase option, then the amortisation period runs to the end of the useful life of the underlying asset. Otherwise, the amortisation period runs to the earlier of:

  • the end of the useful life of the right-of-use asset; or
  • the end of the lease term. [842-20-35-8]

If ownership of the underlying asset is transferred to the lessee, or the lessee is reasonably certain to exercise a purchase option, then the depreciation period runs to the end of the useful life of the underlying asset. Otherwise, the depreciation period runs to the earlier of:

  • the end of the useful life of the right-of-use asset; or
  • the end of the lease term. [IFRS 16.32]

A lessee applies the impairment Codification Subtopic to determine whether a right-of-use asset is impaired and to account for any impairment, which differs in some respects from IFRS Standards. Like IFRS Standards, after recognition of an impairment loss, the future amortisation charges for the right-of-use asset are adjusted to reflect the revised carrying amount. [842-20-25-7, 35-9 – 35-10]

A lessee applies the impairment standard to determine whether a right-of-use asset is impaired and to account for any impairment (see Impairment nonfinancial assets). After recognition of an impairment loss, the future depreciation charges for the right-of-use asset are adjusted to reflect the revised carrying amount. [IFRS 16.33, IAS 36.33]

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IFRS vs US GAAP Lease modifications – General

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US GAAP

IFRS

Like IFRS Standards, a ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease – e.g. adding or terminating the right to use one or more underlying assets. [842 Glossary]

A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease – e.g. adding or terminating the right to use one or more underlying assets. [IFRS 16.Definitions]

Lease modifications – Lessor

US GAAP

IFRS

Like IFRS Standards, a lessor in a sales-type or direct financing lease accounts for a lease modification as a separate contract (lease) if both of the following conditions exist:

  • the modification grants the lessee an additional right of use that was not included in the original contract; and
  • the lease payments increase commensurate with the stand-alone price for the additional right of use, as adjusted for the particular circumstances of the contract. [842 10-25-8]

A lessor in a finance lease accounts for a lease modification as a separate lease if both of the following conditions exist:

  • the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
  • the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. [IFRS 16.79]

If the modification is not a separate contract, then the lessor accounts for a modification to a sales-type lease as follows.

  • Like IFRS Standards, if the modified lease is an operating lease, then the lessor measures the carrying amount of the underlying asset as equal to the carrying amount of the net investment in the original lease immediately before the modification. However, unlike IFRS Standards, the assessment of whether the modified lease is an operating lease occurs at the modification date, based on the facts and circumstances at that date.
  • Unlike IFRS Standards, if the modified lease is a sales-type or direct financing lease, then the lessor measures the initial net investment in the modified lease as equal to the carrying amount of the net investment in the original lease immediately before the modification. [842 10-25-17]

If the modification is not a separate contract, then the lessor accounts for a modification to a direct financing lease as follows.

  • Like IFRS Standards, if the modified lease is an operating lease, then the lessor measures the carrying amount of the underlying asset as equal to the carrying amount of the net investment in the original lease immediately before the modification. However, unlike IFRS Standards, the assessment of whether the modified lease is an operating lease occurs at the modification date, based on the facts and circumstances at that date.
  • Unlike IFRS Standards, if the modified lease is a sales-type lease, then the lessor accounts for the lease in accordance with the guidance on sales-type leases (see above) such that a selling profit or selling loss is recognised. The commencement date of the modified lease is treated as the date of modification.
  • Unlike IFRS Standards, if the modified lease is a direct financing lease, then the lessor measures the initial net investment in the modified lease as equal to the carrying amount of the net investment in the original lease immediately before the modification. [842 10-25-16]

If the modification is not a separate lease, then the lessor accounts for a modification to a finance lease as follows.

  • If the lease would have been classified as an operating lease if the modification had been in effect at the inception date, then the lessor:
    • accounts for the lease modification as the termination of the original finance lease and the creation of a new operating lease from the effective date of the modification; and
    • measures the carrying amount of the underlying asset as the net investment in the original lease immediately before the effective date of the lease modification.
  • Otherwise, it applies the requirements of the financial instruments standard. [IFRS 16.80]

If the modification is not a separate contract, then the lessor accounts for a modification to an operating lease as follows:

  • Like IFRS Standards, if the modified lease is an operating lease, then the lessor accounts for the lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the modified lease.
  • Unlike IFRS Standards, if the modified lease is a sales-type or direct financing lease, then the lessor derecognises any deferred rent liability or accrued rent asset and adjusts the selling profit (loss) accordingly, which is deferred for a direct financing lease (see above). [842 10-25-15]

A lessor accounts for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. [IFRS 16.87]

Lease modifications – Lessee

US GAAP

IFRS

A lessee accounts for a modification to a finance or operating lease as a separate contract if both conditions mentioned above for a lessor exist, which are like IFRS Standards. [842-10-25-8]

A lessee accounts for a modification as a separate lease if both conditions mentioned above for a lessor exist. [IFRS 16.44]

Like IFRS Standards, if the modification is not a separate contract, at the effective date of the modification, then the lessee accounts for the lease modification by remeasuring the lease liability using a discount rate determined at that date and:

  • for lease modifications that decrease the scope of the lease, the lessee decreases the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease, and recognises a gain or loss that reflects the proportionate decrease in scope; and
  • for all other lease modifications, the lessee makes a corresponding adjustment to the right-of-use asset. [842 10-25-11 – 25-13]

Unlike IFRS Standards, a modification that reduces the term of the lease is not accounted for as a decrease in the scope of the lease. Therefore, no gain or loss is recognised.

Unlike IFRS Standards, if the original lease is a finance lease, the modification is not a separate contract and the modified lease is an operating lease, then the right-of-use asset is measured in accordance with the guidance for the initial recognition of a new operating lease (see above). The corresponding difference is accounted for as a rent prepayment or lease incentive. [842 10-25-14]

For a lease modification that is not a separate lease, at the effective date of the modification, the lessee accounts for the lease modification by remeasuring the lease liability using a discount rate determined at that date and:

  • for lease modifications that decrease the scope of the lease (e.g. decrease the leased space or the lease term), the lessee decreases the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease, and recognises a gain or loss that reflects the proportionate decrease in scope; and
  • for all other lease modifications, the lessee makes a corresponding adjustment to the right-of-use asset. [IFRS 16.45–46]

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Sale-leaseback transactions / Sale-and-leaseback transactions

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US GAAP

IFRS

Like IFRS Standards, for both the seller-lessee and buyer-lessor, the accounting for a sale-leaseback transaction depends on whether the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale. Like IFRS Standards, the revenue Codification Topic applies to determine whether a sale has taken place (see IFRS vs US GAAP Revenue recognition). [842 40-25-1]

For both the seller-lessee and buyer-lessor, the accounting for a sale-and-leaseback transaction depends on whether the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale. The parties apply the revenue standard to determine whether a sale has taken place (see IFRS vs US GAAP Revenue recognition). [IFRS 16.99]

Unlike IFRS Standards, if the seller-lessee has a substantive option to repurchase an underlying asset that is not real estate, then the transfer may be a sale if:

  • the strike price to repurchase the asset is its fair value at the date of exercise; and
  • assets that are substantially the same as the underlying asset are readily available.[842 40-25-3]

Unlike IFRS Standards, if the leaseback would be classified as a finance lease by the seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded. [842 40-25-2]

If the seller-lessee has a substantive option to repurchase the underlying asset, then the transfer is not a sale. [IFRS 16.99, IFRS 16.BC262(c), IFRS 15.BC427]

Like IFRS Standards, both parties account for a transaction that does not qualify for sale accounting as a financing. [842 40-25-5]

Both parties account for a transaction that does not qualify for sale accounting as a financing in the scope of the financial instruments standard. [IFRS 16.103]

Like IFRS Standards, if the transaction qualifies for sale accounting, then:

  • the buyer-lessor recognises the underlying asset and applies the lessor accounting model to the leaseback; and
  • the seller-lessee derecognises the underlying asset and applies the lessee accounting model to the leaseback. [842 40-25-4]

If the transaction qualifies for sale accounting, then:

  • the buyer-lessor recognises the underlying asset and applies the lessor accounting model to the leaseback; and
  • the seller-lessee derecognises the underlying asset and applies the lessee accounting model to the leaseback. [IFRS 16.100]

Unlike IFRS Standards, the seller-lessee measures the right-of-use asset at the discounted present value of the lease payments as it would for any other lease (subject to any adjustments described below). Unlike IFRS Standards, it recognises a gain or loss for the difference between the sale proceeds (subject to any adjustments described below) and the carrying amount of the underlying asset. [842 40-30-1]

The seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount (i.e. at cost). It recognises only the amount of any gain or loss related to the rights transferred to the buyer-lessor. [IFRS 16.100]

Like IFRS Standards, adjustments are required if the sale is not at fair value or lease payments are off-market. [842 40-30-2 – 30-3]

Adjustments are required if the sale is not at fair value or lease payments are off-market. [IFRS 16.101–102]

Sub-leases

US GAAP

IFRS

Like IFRS Standards, a ‘sub-lease’ is a transaction in which a lessee (or ‘intermediate lessor’) grants a right to use the underlying asset to a third party, and the lease (or ‘head lease’) between the original lessor and lessee remains in effect. The intermediate lessor accounts for the head lease and the sub-lease as two different contracts. [842 Glossary]

A ‘sub-lease’ is a transaction in which a lessee (or ‘intermediate lessor’) grants a right to use the underlying asset to a third party, and the lease (or ‘head lease’) between the original lessor and lessee remains in effect. The intermediate lessor accounts for the head lease and the sub-lease as two different contracts. [IFRS 16.Definitions]

Unlike IFRS Standards, an intermediate lessor classifies the sub-lease with reference to the underlying asset, which may frequently result in different sub-lease classification between IFRS Standards and US GAAP. [ASU 2016-02.BC116, 842-10-25-2 – 25-3]

An intermediate lessor classifies the sub-lease as a finance lease or as an operating lease with reference to the right-of-use asset arising from the head lease. [IFRS 16.B58]

US GAAP

IFRS

Unlike IFRS Standards, an entity accounts for a lease between related parties on the basis of the legally enforceable terms and conditions of the lease. If a sale-leaseback transaction is between related parties, then neither party makes an adjustment for off market terms. [842-10-55-12, 842-40-30-4]

There is no specific guidance on accounting for leases between related parties and the general requirements outlined above apply.

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