The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a joint project in 2006 intended to comprehensively restructure the existing lease accounting guidance for both lessees and lessors. While one might expect that many of the recently released standards match up, some of them do not. Specifically when it comes to leasing. We learn more from Mandi Polick in this excerpt from her article on AccountingWeb.com
One of the most significant differences between the two standards relates to the classification of a lease. Under US GAAP, a lessee must determine whether a lease is an operating or a finance lease. The lease expense is typically higher in the earlier years of the lease term. IFRS does not distinguish lease classifications for a lessee.
Lessor accounting is also slightly different between the two bases of accounting. A lessor has three categories to determine classification under US GAAP: an operating, a direct financing, or a sales-type lease. A lessor only has two categories to classify a lease under IFRS: an operating or a finance lease.
The two standards also differ in the definition of a lease. Under US GAAP, the definition of a lease is specific to identified property, plant, or equipment. Under IFRS, a lease can be any asset and the definition of a lease is not restricted to just property, plant, or equipment. IFRS 16 further notes that a lessee may, but is not required to, apply the leasing guidance to leases of intangible assets other than those under licensing arrangements.
IFRS also includes a threshold exemption for leases of low-value assets, such as tablets and personal computers, small items of office furniture, and telephones. This exemption allows a lessee not to recognize these leases on its balance sheet. The IASB noted low-value assets referred to assets less than $5,000 during its deliberations. No such exemption exists under US GAAP.
Another key difference between the two standards relates to the classification of a sublease. (GAAP) requires 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. IFRS 16 requires that the sublessor determine the sublease classification by referencing the right-of-use asset that arose from the original lease.
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