1.1 Leasing accounting guidance—background
Summary of key differences between ASC 842 and IFRS 16
ASC 842 requires a lessee to classify a lease as either a finance or operating lease. Interest and amortization expense are recognized for finance leases while only a single lease expense is recognized for operating leases, typically on a straight-line basis.
Under IFRS 16, lessees will account for all leases in a manner similar to finance leases.
Under ASC 842, a sale and related profit are recognized upon the commencement of a lease only when the arrangement transfers control of the underlying asset to the lessee, i.e., in a sales-type lease, but not in a direct financing lease. Also, lessors may elect to combine certain nonlease components into the related lease component.
Under IFRS 16, selling profit is recognized on direct financing leases when performance obligations, defined in IFRS 15, Revenue from Contracts with Customers, have been met. Under IFRS 16, generally lessors may not combine lease and nonlease components.
Statement of cash flows
ASC 842 requires lessees to report the single expense associated with an operating lease as an operating activity.Under IFRS 16, lessees account for all leases similar to a financed purchase, with payments reported as a financing or operating activity in the statement of cash flows, in accordance with IAS 7, Statement of Cash Flows.
Remeasurement of variable lease payments
The initial measurement of lease-related assets and liabilities is similar under ASC 842 and IFRS 16; however, subsequent changes in lease payments that vary with a rate or index (e.g., rents that increase for changes in an inflation index) are accounted for differently.
Under ASC 842, such changes are recognized when incurred, unless the lessee is otherwise required to remeasure the lease liability (e.g., as a result of reassessing the lease term).
Under IFRS 16, lease assets and liabilities are remeasured whenever the cash flow changes.
Note about ongoing standard setting
In October 2020, the FASB issued an exposure draft for targeted improvements and amendments to the leases standard. Under the proposed guidance, lessees would have an option on an entity-wide basis to remeasure lease liabilities upon a change in the index or rate affecting future lease payments. As of the cut-off date of this guide, the proposed amendments have not yet been issued. Reporting entities should continue to monitor the status of these proposed amendments and any additional updates to the leases standard.
Sale and leaseback accounting
Under ASC 842, a seller-lessee would recognize the full gain from a sale and leaseback transaction that qualifies as a sale. IFRS 16 limits the recognition of gains from sale and leaseback transactions.
ASC 842 requires a modified retrospective approach to each lease that existed at the date of initial application as well as leases entered into after that date. It must elect whether the date of initial application is the beginning of the earliest comparative period presented in the financial statements, or the beginning of the period of adoption. In the latter case, the reporting entity would not adjust the comparative periods. ASC 842 does not permit a full retrospective approach.
IFRS 16 allows a reporting entity to elect a full retrospective approach, or a simplified approach, but not the modified retrospective approach.
• IFRS 16 has guidance excluding certain leases of low value assets from its recognition and measurement guidance
• IFRS 16 has similar but not identical disclosure requirements
• The accounting for subleases differs in some respects
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