The leases project began as a joint project with the IASB, and many of the requirements in Topic 842 are the same as the requirements in IFRS 16. The main differences between Topic 842 and IFRS 16 are in relation to certain aspects of the lessee accounting model. In contrast to the lessee accounting model in Topic 842, which distinguishes between finance leases and operating leases in the financial statements, the lessee accounting model in IFRS 16 requires all leases to be accounted for consistent with the Topic 842 approach for finance leases. Consequently, leases classified as operating leases under Topic 842 will be accounted for differently under GAAP than under IFRS and will have a different effect on the statement of comprehensive income and the statement of cash flows under IFRS 16 than under previous IFRSs. The following are the other notable requirements of IFRS 16 that are not consistent with the requirements in Topic 842:
1. Lessee accounting model
a. IFRS 16 has a lessee recognition and measurement exemption for leases of assets with values of less than $5,000.
2. Lessor accounting model
a. IFRS 16 does not distinguish between sales-type and direct financing leases; therefore, IFRS 16 permits recognition of selling profit on direct financing leases at lease commencement.
b. IFRS 16 does not include any explicit guidance on collectibility of the lease payments and amounts necessary to satisfy a residual value guarantee.
c. IFRS 16 applies a model to modifications of sales-type and direct financing leases that is predicated on IFRS financial instruments guidance.
3. Measurement of the right-of-use asset
a. IFRS 16 allows alternative measurement bases for the right-of-use asset (for example, the fair value model under IAS 40, Investment Property, or at a revalued amount in accordance with IAS 16, Property, Plant and Equipment).
4. Variable lease payments
a. IFRS 16 requires reassessment of variable lease payments that depend on an index or a rate when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect).
a. When classifying a sublease, IFRS 16 requires an intermediate lessor to determine the classification of the sublease with reference to the right-of-use asset arising from the head lease.
6. Sale and leaseback transactions
a. IFRS 16 does not include application guidance on whether the transfer of an asset in a sale and leaseback transaction is a sale, other than to state that if the seller-lessee has a substantive repurchase option regarding the underlying asset, then no sale has occurred.
b. IFRS 16 restricts the gain recognized by a seller-lessee in a sale and leaseback transaction to the amount of the gain that relates to the buyer-lessor's residual interest in the underlying asset at the end of the leaseback.
7. Private companies
a. IFRS 16 does not have guidance specifically for private companies; however, Topic 842 permits an accounting policy election for private companies to use a risk-free rate to discount the lease liability for each lease.
8. Statement of cash flows
a. IFRS 16 accounts for payments of interest in accordance with IAS 7, Statement of Cash Flows. IAS 7 allows interest to be classified within operating, investing, or financing activities.
a. IFRS 16 has similar but not identical qualitative and quantitative disclosure requirements to Topic 842.
a. IFRS 16 has different transition provisions than Topic 842 as a result of the differences in the lessee and lessor accounting provisions.
11. Existing differences in other areas of GAAP and IFRS that affect the accounting for leases
a. The key areas of difference are the existing requirements for impairment (of financial instruments and long-lived assets other than goodwill) and the accounting for investment properties.