In the era of economic globalization, business heads and account managers must know the predominant accounting standards used today. International Financial Reporting Standards or IFRS, developed by International Accounting Standards Board – IASB and Generally Accepted Accounting Principles or GAAP set by Financial Accounting Standards Board – FASB are two of them.
Leasing is a common practice across different industries. The stakeholders involved had for a long time expressed concerns regarding the existing lease account standards. The lack of transparency in representing lease transactions for financial statement users was an issue.
Consequently, FASB and IASB came together to update and restructure the lease accounting standards in 2016. As a result, many of the requirements are similar. It includes recording lease assets and liabilities on the balance sheet and disclosure requirements.
However, there are many differences as well. Those companies with global portfolios must know these differences so that correct interpretation of financials can be done according to the new lease standards. Also, you can use a lease accounting software to make the process hassle-free.
Top 3 differences between GAAP and IFRS 16 lease accounting standards
Definition of a lease is one of the major differences in GAAP and IFRS lease accounting standards. Under the US GAAP, the standards differentiate between operating and financial leases. Also, a lease is defined specifically in relation to property, equipment, or plant.
In IFRS 16, the definition of a lease is not restricted to property, equipment, or plant. Instead, a lease can be any asset. Moreover, leased assets with less than 5,000 dollar value need not be accounted for.
For example, if your company is leasing assets such as computers, furniture, or telephones, and these are less than the threshold, you do not require to record these leases on the financial statements. There are no such exemptions under US GAAP.
Lease and Sublease Classification
Under US GAAP, it remains the same with operating and finance as the two classifications under ASC 842. The only difference in classification is regarding the timing of interest expense when recorded on the balance sheet. Whereas IFRS 16 accounts for only one type of lease which is the finance lease, and there are no classification criteria per se.
As for the classification of the sublease, there are vital differences between both lease accounting standards.
According to ASU No. 2016-02 of US GAAP, “an initial lessee that subleases the underlying asset, therefore becoming a sublessor, to determine the classification of the sublease by referencing the leased asset in the original lease.”
At the same time, IFRS 16 asks that the sublessor decide the sublease classification by taking references of the ROU or right-of-use asset that came up from the original lease.
Sale and Leaseback Transactions
Sales and Lease transactions differ for both US GAAP and IFRS 16 standards. In US GAAP, Topic 606 – Revenue from Contracts with Customers defines sale requirements. If the sale and leaseback transaction does not satisfy these requirements, it is not considered a sale. Also, if the transaction is a sale, the seller-lessee can recognize the entire gain on the transaction.
IFRS 15 has Revenue from Contracts with Customers which needs to be satisfied for a sale and leaseback transaction to be considered as the sale. But the main focus is given to performance obligation. If the transaction is a sale, the seller and lessee, at the end of the leaseback, can only recognize a gain for the amount that relates to the buyer-lessor’s residual interest in the leased asset.
These are the top 3 differences between GAAP and IFRS lease accounting standards. Corom Lease Management from Yardi is one of the best lease management and lease accounting software that can help you in implementing US GAAP and IFRS 16 standards without hassles. Visit www.yardicorom.com/ for more details.