What Are the Differences Between ASC 842 & IFRS 16?
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ASC 842 is the US GAAP standard for accounting for leases governed by the Financial Accounting Standards Board (FASB), while IFRS 16 is the corresponding International Financial Reporting Standard(s) governed by the International Accounting Standards Board (IASB). The two standards are generally similar in their requirements, but there are some key differences.
Lease accounting under ASC 842
ASC 842 is the lease accounting standard set forth by the FASB. The standard was issued in 2016 and became effective for public companies in 2019. For private companies, ASC 842 became effective in 2021 for reporting periods thereafter.
The key provisions of ASC 842 are as follows:
- All leases must be reported on the balance sheet as a right-of-use asset and a corresponding lease liability.
- Lessor accounting is largely unchanged from prior GAAP.
- Capital leases are now called finance leases.
Under ASC 842, a lessee recognizes a right-of-use asset and a corresponding lease liability on the balance sheet for most leases. The lease asset represents the lessee’s right to use the leased property over the lease term, while the lease liability represents the lessee’s obligation to make payments under the lease.
ASC 842 requires that leases be classified as either operating or finance leases. Operating leases are treated much like they were under previous GAAP standards—expenses are recognized on a straight-line basis over the lease term. However, unlike ASC 840, operating leases are recognized on the balance sheet. In contrast, finance leases result in the recognition of interest expense and amortization of the lease asset on a straight-line basis over the lease term.
Lessor accounting under ASC 842 is largely unchanged from previous GAAP standards, with operating leases generally not reported on the balance sheet, while sales-type and direct financing leases cause the original owned asset to be replaced by a receivable representing the rent stream, and interest income and potential sales profit recognized separately.
Lease accounting under IFRS 16
IFRS 16 is the corresponding international financial reporting standard for leases. The standard was issued by the International Accounting Standards Board (IASB) in 2016 and became effective for annual periods beginning on or after January 1, 2019.
The key provisions of IFRS 16 are as follows:
- All leases must be reported on the balance sheet as a right-of-use asset and a corresponding lease liability, with expenses recognized according to the finance lease model.
- Lessor accounting remains materially unchanged from the old standard IAS 17 where lessors continue to classify leases as operating or finance (with no differentiation between sales-type and direct financing leases).
- There is a single lessor accounting model regardless of lease classification.
- Lessees have an exemption for low value leases where the new underlying asset has value less than or equal to $5,000.
Key takeaways of ASC 842 vs. IFRS 16
The key difference between ASC 842 and IFRS 16 is that, under IFRS 16, there is a single lessee accounting model approach that is of finance leases, whereas lessors will continue to distinguish between operating and finance leases. Under ASC 842, however, there are separate lessee models for accounting for operating leases and finance leases. As a result, lessees and lessors may apply different principles when determining whether a lease is an operating lease or a finance lease.
Making compliance easier for ASC 842 or IFRS 16
Maintaining compliance for either of the standards can be difficult and time-consuming.
Fortunately, there are software solutions like EZLease that can help. Lease accounting software can automate many of the tasks associated with lease accounting, including the classification of leases, the calculation of assets and liabilities recognized on the balance sheet and the recognition of expenses on the income statement. As a result, using lease accounting software can help reduce the risk of non-compliance and save time and money.
Get started with a free demo of EZLease today to ensure compliance for ASC 842 or IFRS 16.
