IFRS 16 and ASC 842 are two major lease accounting standards issued by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), respectively. While both standards aim to improve transparency and comparability in financial reporting, they differ in several key aspects. Let’s have a look.
Scope and Definition of a Lease:
IFRS 16: Under IFRS 16, a lease is defined as a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
ASC 842: ASC 842 defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment (the underlying asset) for a period of time in exchange for consideration.
Recognition and Measurement of Leases:
IFRS 16: Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with certain exceptions for short-term leases and low-value assets.
ASC 842: ASC 842 also requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for most leases, with similar exceptions for short-term leases and low-value assets.
Lease Classification:
IFRS 16: IFRS 16 does not distinguish between finance leases and operating leases for lessees, as all leases are treated as finance leases.
ASC 842: ASC 842 retains the distinction between finance leases and operating leases for lessees, with different accounting treatments for each type of lease.
Presentation in the Financial Statements:
IFRS 16: Under IFRS 16, lessees present right-of-use assets separately from other assets in the balance sheet and disclose lease-related expenses in the income statement.
ASC 842: ASC 842 also requires lessees to present right-of-use assets separately from other assets in the balance sheet but allows lease-related expenses to be classified as either operating or financing activities in the cash flow statement.
Disclosures:
IFRS 16: IFRS 16 requires extensive disclosures about a lessee’s leasing activities, including information about lease liabilities, lease terms, and cash flows arising from leases.
ASC 842: ASC 842 also requires detailed disclosures about a lessee’s leasing activities, but the specific disclosure requirements differ slightly from those under IFRS 16.
Conclusion:
While IFRS 16 and ASC 842 are similar in many respects, such as the recognition of right-of-use assets and lease liabilities on the balance sheet, they differ in certain key areas, such as the classification of leases and the presentation of lease-related expenses in the income statement and cash flow statement. Companies that operate in multiple jurisdictions must carefully consider these differences to ensure compliance with both sets of standards.