Summary of IFRS 16 differences with ASC 842

This is a bit later in posting than I had intended, but below is a review of the substantive differences between IFRS 16, the new lease accounting standard for entities covered by international financial reporting standards, and ASC 842, the equivalent new standard under US GAAP. Please look at my previous review of ASC 842 for general comments on the new lease accounting regime, including those that apply to both standards.

(Almost) all leases are finance

Unlike current accounting and ASC 842, the IASB has chosen to use the finance lease model, with depreciation and interest expense recognized and an inherently front-loaded expense profile, for all leases. However, in addition to the short-term lease exemption that ASC 842 recognizes (for leases with an initial non-cancelable term of 12 months or less), IFRS 16 permits (though doesn’t require) excluding leases of “low value” (the IASB in its deliberations indicated that they considered the threshold to be approximately US$5,000, but that figure is not used in the main text of IFRS 16, only in the Basis for Conclusions). The low value exemption can be invoked on a lease by lease basis; the short-term exemption must be used consistently for all leases in a class of asset (though why anyone would want to capitalize a lease that falls within the short-term definition is not obvious to me).

There are two choices for how to handle the transition for operating leases. This choice must be applied consistently to all lessee leases:

 a)    As with ASC 842, existing operating leases are capitalized as of the beginning of the first comparable period; under IFRS 16, that will usually be one year before the transition date. The initial capitalized value is the present value of the remaining rent payments, using the incremental borrowing rate at the date of initial application as the interest rate. Any deferred rent liability is subtracted from the initial capitalized value to provide the initial gross asset value.

or
b)    The liability is calculated as of the transition date. The asset is either based on the liability at transition, as described in a), or is the carrying amount that would have been recognized had the lease been capitalized from inception. This choice for the asset may be made on a lease-by-lease basis. The primary purpose of this is to reduce the increase in expenses that would otherwise happen switching to the front-loaded finance lease expense model (by setting up an asset less than the liability, with the difference recognized as an adjustment to equity).

If the leased asset is being held as investment property under IAS 40, that standard’s provisions are used to determine the fair value of the asset at each period, and depreciation is not recognized.

Beginning date

IFRS 16 requires implementation for annual reporting periods beginning on or after 1 January 2019. ASC 842 uses December 15, 2018, which means that the required implementation year will differ for entities that have a late December fiscal year end (as can happen for companies that always end their fiscal year on a particular day of the week, for instance). IFRS 16 permits earlier implementation, but implementation cannot be earlier than implementation of IFRS 15, Revenue from Contracts with Customers, also known as RevRec. No separate deadline is provided for nonpublic entities (unlike ASC 842, which gives them an extra year).

Lessor finance leases

ASC 842 recognizes two different types of finance leases for lessors: sales-type and direct financing. IFRS 16 only recognizes a single type. Selling profit therefore can be recognized on a lease that would be considered direct financing by ASC 842.

Variable lease payments

If rents change because of a change to an index or rate, IFRS 16 requires recalculation of the liability based on the new rent, with a corresponding change to the asset. (ASC 842 treats such changes as expensed when incurred, with no impact on the balance sheet, like existing contingent rents.)