From the IFRS Institute - Aug 31, 2018
The FASB has amended ASC 842 three times in 2018, with further amendments for lessors under consideration. IFRS 161 remains the same standard that was issued in 2016. In this article, we focus on the approach to transition for lessees under each standard, considering the FASB’s changes and the knock-on effect on the differences between IFRS and US GAAP.
KPMG’s Lease Accounting Survey (US GAAP) reveals that companies have significant work ahead in preparing for their adoption of the new leases standard; while that survey was based on the US standard, the findings are consistent with our experience ahead of the adoption of IFRS 16. Our article, Business implications of the new lease accounting standard, looks at the organizational challenges being encountered, while here we focus on the Day 1 transition for lessees.
The overall approach on transition was one of the significant differences between IFRS 16 and ASC 842.2 IFRS permits companies to recognize transition adjustments at the beginning of the year of adoption, while ASC 842 originally required the restatement of comparative periods in all cases. As a result, KPMG previously reported that dual reporters may need to start implementing the leases standards earlier than companies that only report under IFRS to be able to present comparative information in their US GAAP reporting.
That has changed.
In August 2018, the FASB issued an amendment (ASU 2018-11) that allows companies to not restate comparatives when adopting ASC 842. For a company electing this new transition alternative, the transition adjustments will be recognized in equity at the beginning of the year of adoption, rather than as of the beginning of the earliest comparative period presented.
For a calendar year-end company adopting the new leases standards in 2019 (i.e. the date of adoption is January 1, 2019), the following diagram shows consistency in the overall transition approaches. The diagram assumes that the company is not an SEC registrant and presents only one year of comparative information.3
However, notwithstanding a similar overall approach between IFRS and US GAAP, differences remain by virtue of the different practical expedients available on transition. This includes additional relief introduced by the FASB in January 2018 related to land easements (ASU 2018-01).
Here we consider the transition differences for lessees following the FASB’s amendments. Although dual reporters no longer need to restate comparatives for US GAAP purposes, allowing consistency with IFRS, they will need to carefully sort through their choice of practical expedients, and consider other differences, to achieve consistency in the transition approach.
|Lessees: IFRS 16||Lessees: ASC 842|
|Lessees have a choice of adopting IFRS 16 by restating comparatives (retrospective approach) or without restating comparatives (modified retrospective approach).||Like IFRS, lessees have a choice of adopting ASC 842 by restating comparatives (comparative method) or without restating comparatives (effective date method).|
|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 17.4||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.|
|Modified retrospective approach||Effective date method|
Like IFRS, the lessee:
For a finance lease under IAS 17, the lease liability and right-of-use asset are measured based on the carrying amounts of the liability and finance lease asset under IAS 17.
There is a single lessee accounting model under IFRS 16 (equivalent to the finance lease model under ASC 842). Therefore, there is a single transition method.
For a capital (finance) lease under ASC 8405 classified as a finance lease under ASC 842, the lease liability and right-of-use asset are measured based on the carrying amounts of the capital lease liability and capital lease asset under ASC 840. The right-of-use asset is adjusted to include unamortized initial direct costs not included in the capital lease asset under ASC 840. This approach is broadly similar to IFRS.
For a capital (finance) lease under ASC 840 classified as an operating lease under ASC 842 (expected to be infrequent), the lease liability and right-of-use asset are measured, in effect, as if the lease had always been an operating lease accounted for under ASC 842.
|For an operating lease under IAS 17:
For an operating lease under ASC 840:
|IFRS 16 includes a number of exemptions or practical expedients that lessen the burden on transition. These are discussed below in items (A) to (G). For a finance lease under IAS 17, only items (A) to (C) are available.||ASC 842 includes a number of exemptions or practical expedients that lessen the burden on transition. These are discussed below in items (1) to (7). They differ in a number of respects from IFRS, and apply to both operating and capital leases under ASC 840.|
|All of the items (A) to (G) may be elected independently of each other.
||Unlike IFRS, there are restrictions on the combinations of practical expedients that may be elected.
|A. For existing contracts at the effective date, lessees may elect to grandfather (bring forward) their previous assessment of which contracts are or contain leases. This election is made for all leases.||1. Like IFRS, for existing contracts at the effective date, lessees may elect to grandfather their previous assessment of which contracts are or contain leases. Also like IFRS, this election is made for all leases. However, unlike IFRS, this practical expedient must be elected together with items (2) and (5).|
|There is a single lessee accounting model under IFRS 16 (equivalent to the finance lease model under ASC 842). Therefore, a practical expedient related to classification would not be relevant.||2. Lessees may elect to grandfather their previous classification of leases as either operating or finance (previously capital) leases. This is relevant because there are two lessee accounting models under ASC 842, unlike IFRS. This election is made for all leases, and it must be elected together with items (1) and (5).|
|B. In applying IFRS 16 on an ongoing basis, lessees may elect, by class of underlying asset, not to apply lessee accounting to leases with a lease term ≤12 months. On transition, the exemption applies to leases with a remaining lease term ≤12 months.||3. Like IFRS, in applying ASC 842 on an ongoing basis, lessees may elect, by class of underlying asset, not to apply lessee accounting to leases with a lease term ≤12 months. Unlike IFRS, if the lessee elects this exemption for ‘short-term’ leases post-adoption, on transition it applies to leases within those same classes of underlying asset with a total lease term ≤12 months.|
|C. In applying IFRS 16 on an ongoing basis, lessees may elect, on a lease-by-lease basis, not to apply lessee accounting to leases of low-value items. On transition, these are items with an as-new value of, for example, ≤ $5,000.||Unlike IFRS, there is no exemption for leases of low-value items.|
|D. In applying IFRS 16 on an ongoing basis, lessees may apply a single discount rate to a portfolio of leases with similar characteristics. On transition, the portfolio should have reasonably similar characteristics.||4. Like IFRS, in applying ASC 842 on an ongoing basis, lessees may apply a single discount rate to a portfolio of leases with similar characteristics. This portfolio approach also applies on transition.|
|E. Lessees may rely on a previous assessment of whether leases are onerous immediately before transition as an alternative to performing an impairment review. This election is made on a lease-by-lease basis.||Unlike IFRS, US GAAP does not include generic guidance on contracts that might be onerous. However, previous accruals related to ceasing use of a leased asset or entering into a loss-making sublease are factored into initial measurement of the lease on transition.|
|F. Lessees may exclude initial direct costs from the measurement of the right-of-use asset at the effective date, which means that any previously capitalized amounts will be written off on transition (to the extent not already amortized). This election is made on a lease-by-lease basis.||5. Unlike IFRS, lessees may choose not to write off on transition any unamortized initial direct costs that do not meet the ASC 842 definition; this means that the unamortized balance remains on the balance sheet on transition. This election is made for all leases, and must be made together with items (1) and (2), unlike IFRS.|
|G. Lessees may use hindsight – e.g. the likelihood that lessee options will be exercised to extend or terminate a lease or purchase the underlying asset. This election is made on a lease-by-lease basis.||6. Like IFRS, lessees may use hindsight when considering the likelihood that lessee options to extend or terminate a lease or purchase the underlying asset will be exercised. This election is made for all leases, unlike IFRS.|
|There is no practical expedient related to land easements.||7. Lessees may elect not to assess whether land easements are or contain leases if they were not previously accounted for as leases. This election is made for all land easements.|
|Retrospective approach||Comparative method|
Like IFRS, the lessee:
|The only practical expedient available is item (A) above, applied at the beginning of the earliest period presented.||Unlike IFRS, the practical expedients available mirror those under the effective date method – items (1) to (7) – applied as of the beginning of the earliest period presented.|
In general, the disclosures are derived from IAS 8.7 In addition, lessees disclose the transition approach adopted and practical expedients elected.
|In general, the disclosures are derived from ASC 250,8 and are similar to the IFRS disclosures. In addition, like IFRS, lessees disclose the transition method adopted and practical expedients elected.|
|The disclosures are more extensive when the modified retrospective approach is adopted and include:
||The disclosures are more extensive when the effective date method is adopted, but the additional requirements differ from IFRS. Lessees provide all of the disclosures previously made under ASC 840 for the comparative periods in the financial statements, including future operating and capital (finance) lease commitments.
|Before the adoption of IFRS 16, companies are required to disclose known or reasonably estimable information relevant to assessing the possible effect of the new standard on the financial statements.||Before the adoption of ASC 842, SEC registrants are required to disclose the potential material effects from adoption of the new standard, like IFRS, except that this requirement does not apply to all companies.|
Marybeth Shamrock, KPMG’s Advisory lead for Leasing, has helped and discussed the new leasing standards with several clients. While highlighting the need to start early and inventory all leases, companies should assess what their new processes under IFRS 16 will entail including if a potential lease solution addresses the need for:
Designing and implementing a process and associated controls are key to a successful adoption of IFRS 16.
Article, Business implications of the new lease accounting standard, August 2018
Article, Leases: Top differences between IFRS 16 and ASC 842, updated August 2018
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
2 ASC 842, Leases
3 If the company was an SEC registrant, the equity adjustment would be recognized as of January 1, 2017 if the company elected to restate comparatives, and the 2017 financial information would be prepared on the basis of IFRS 16 / ASC 842. There would be no change to the diagram if the company elected not to restate comparatives.
4 IAS 17, Leases
5 ASC 840, Leases
6 For example, minimum rentals may include or exclude amounts related to executory costs that will be treated differently when determining the ‘lease payments’ under ASC 842.
7 IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
8 ASC 250, Accounting Changes and Error Corrections