Leases: Top differences between IFRS 16 and ASC 842
Leases: Top differences between IFRS 16 and ASC 842
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Leases: Top differences between IFRS 16 and ASC 842

The IFRS and US GAAP requirements for lessees’ Day Two accounting will create significant implementation issues.

From the IFRS Institute - August 2017

Effective January 1, 2019 for many companies, the IASB’s and the FASB’s new leases standards1 require nearly all leases to be reported on lessees’ balance sheets as assets and liabilities. The IFRS and US GAAP requirements are similar for lessees on ‘Day One’. However, the ‘Day Two’ accounting will create significant implementation issues for dual reporters.

The leasing project was a joint project between the IASB and the FASB. As a result, the lease definition and Day One lessee accounting are mostly converged. However, the Boards’ views diverged over the course of the project and resulted in significant differences on Day Two lessee accounting and transition provisions.

In particular, lessees no longer classify their leases between operating and finance under IFRS, but will continue to do so under US GAAP.

  • IFRS 16 uses a single lessee accounting model that is similar to that of finance leases under current IAS 17. Therefore, from an income statement perspective, the IFRS model treats all leases as a financing arrangement.
  • However, under US GAAP, only leases classified as finance leases are treated as financing arrangements from an income statement perspective; while the lessee will report an asset and a liability related to all leases on its balance sheet (like IFRS), the Day Two accounting for operating leases will generally continue to produce a straight-line total lease expense. 

And in applying those accounting models, one notable difference that will need to be captured in the implementation process is the accounting for lease payments that depends on an index or rate. In a simple real estate lease, suppose that lease payments increase by the respective change in the consumer price index (CPI) each year. Under IFRS, the liability is remeasured each year to reflect the most current CPI. Under US GAAP, the liability is not remeasured for changes in the CPI unless remeasurement is required for another reason; instead, the additional payments are recognized as incurred. As a result, the liability under IFRS could grow to be significantly greater than the liability under US GAAP, which would exaggerate the income statement difference (because those impacted will often be operating leases under US GAAP).

We believe these and other areas of divergence will cause significant challenges for companies that report under both IFRS and US GAAP. Companies will need to maintain different processes, controls and accounting systems for each framework to comply with the different lessee reporting requirements.

IFRS 16 is effective January 1, 2019 for all calendar-year companies, similar to ASC 842 for calendar-year public business entities. Nonpublic entities in the United States may therefore decide not to take advantage of the one year deferral offered by ASC 842 if they are also IFRS preparers.

Here are our top lessee differences between IFRS and US GAAP. This selection is based on the potential effect on earnings that these differences may have, as well as the complexity they may create related  to systems, controls and process implementation to comply with both GAAPs. For a more comprehensive listing of differences, including for lessor accounting, see KPMG’s publication, IFRS compared to US GAAP.

 

IFRS 16 ASC 842 Consideration for preparers

Effective date

The new standard is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted if the new revenue standard is also adopted.

ASC 842 is effective for annual periods beginning after December 15, 2018 for public business and certain other entities, and after December 15, 2019 for other entities. Early adoption is permitted.

Nonpublic dual reporters may decide to adopt both ASC 842 and IFRS 16 on the same date.

Transition approach and comparatives

Companies have a choice of adopting IFRS 16 by restating comparatives (retrospective approach) or without restating comparatives (modified retrospective approach).

A series of exemptions or practical expedients is available for lessees, each of which may be elected independently of other elections. They apply mainly to the modified retrospective approach for leases that were operating leases under IAS 172.

Like IFRS, lessees have a choice of adopting ASC 842 by restating comparatives (comparative method) or without restating comparatives (effective date method).

Like IFRS, a series of exemptions or practical expedients is available for lessees. However, unlike IFRS, there are restrictions on the combinations of practical expedients that may be elected, and they apply equally to both transition methods.

Our original article in August 2017 highlighted that lessees were required to restate comparatives under US GAAP – a significant difference from IFRS.

That has changed. In August 2018, the FASB amended ASC 842 (ASU 2018-11) to introduce the effective date method, for which comparatives are not restated.

This amendment means that dual reporters no longer need to restate comparatives for US GAAP purposes, allowing consistency with IFRS. However, dual reporters will need to carefully sort through their choice of practical expedients, and consider other differences, to achieve consistency in the transition approach.

Leases recognized on the balance sheet

Lessees may elect to apply the recognition exemption for leases of ‘low-value’ assets – e.g. underlying assets with a value ≤ $5,000 when new, even if they are material in aggregate.

There is no exemption for leases of low-value assets.

Dual reporters will have to decide whether to use the low-value exemption or recognize leases of low-value assets to maintain consistency between US GAAP and IFRS reporting. When applying the exemption, dual reporters will have to identify leases of low-value assets in the entire lease population to quantify the adjustment between US GAAP and IFRS.

Lease classification

Lessees apply a single on-balance sheet lease accounting model.

There is a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases. Lease classification affects subsequent measurement of the right-of-use asset, lease expense and income statement presentation.

Dual reporters will have to separately track leases that have a different classification between US GAAP and IFRS because their accounting will be different.

Remeasurement assessment for leases tied to an index or rate

Lessees remeasure the lease liability for changes in variable lease payments based on an index or rate on the date when there is a change in the contractually required cash flows.

Adjustments to an index or rate do not constitute a reassessment event.

Dual reporters will have to separately track the remeasurement assessment for leases that are tied to an index or rate.

Sale-leaseback transactions

If the seller-lessee has a substantive option to repurchase the underlying asset, the transfer is not a sale.

If the seller-lessee has a substantive option to repurchase an underlying asset that is not real estate, the transfer may be a sale under certain circumstances.

If the leaseback would be classified as a finance lease by a seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.

Dual reporters will have to separately track the accounting for sale-leaseback transactions.

The seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset (i.e. at cost). Only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized.

The seller-lessee measures the right-of-use asset at the present value of the lease payments in the same way as any other lease. A gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.

 

Subleases

Unless the sublessor for the head lease applies the recognition and measurement exemption applicable to short-term leases, a sublessor classifies a sublease by reference to the right-of-use asset arising from the head lease.

A sublessor classifies a sublease by reference to the underlying asset.

We expect that most subleases under ASC 842 will be classified as operating leases, while most subleases under IFRS 16 will be classified as finance leases by the sublessor.



Further resources

Article, Business implications of the new lease accounting standard, August 2018

Article, Lessees: Transition differences between IFRS and US GAAP, August 2018

All IFRS resources on lease accounting under IFRS 16, IFRS Institute

All US GAAP resources on lease accounting under ASC 842, including amendments and the latest proposals: Financial Reporting View

Comparison between IFRS 16 and ASC 842 (before FASB amendments): IFRS compared to US GAAP

Technology consulting and selection of a lease accounting system: KPMG Lease Accounting Tool

 

1 IFRS 16, Leases, issued January 2016; and ASC 842 issued as ASU 2016-02, Leases (Topic 842), in February 2016

2 IAS 17, Leases
 

 
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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