ASC 842 + IFRS 16

What is ASC 842?

ASC 842 is the current US standard for GAAP lease accounting that requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The Financial Accounting Standards Board, or FASB, established this new standard in 2016 to foster more transparency between investors and companies.

What is Lease Accounting?

Lease accounting is the process by which a company records the financial impacts of its leasing activities. Leases that meet specific classification requirements must now be recorded on a company's financial statements according to current US GAAP guidance.

What is IFRS 16?

IFRS 16 is the current international financial reporting standard for lease accounting that requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The International Accounting Standards Board, or IASB, established this new standard in 2016 to foster more transparency between investors and companies.

What is the difference between ASC 842 vs. IFRS 16?

The most significant difference ASC 842 vs. IFRS 16 is the definition of a lease. ASC 842 defines two types of lease classifications – operating leases and finance leases. IFRS defines all leases as finance leases.

With ASC 842, only property and equipment are within scope of the new guidance whereas all intangible assets are exempt. Under IFRS 16, lessees may apply the guidance to leases of intangible leased assets as well.

Both ASC 842 and IFRS 16 apply only to leases with a term longer than 12 months. However ASC 842 requires reporting for leases of any value, versus IFRS 16 that excludes this requirement for low-value assets.

What is an Operating Lease?

An operating lease is a contract that allows for the use of an asset but does not convey ownership rights of the asset.

What is a Finance Lease?

A finance lease is a contract that that allows for the use of an asset and has at least one of five criteria making it like the purchase or conveyance of ownership at the end of the lease term.

What is the difference between an Operating Lease and a Finance Lease?

An operating lease is a contract that permits the use of an asset without transferring the ownership rights of said asset. A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, or has similar criteria at the termination of the lease.

What is a Capital Lease?

A capital lease is the previous term used under ASC 840 US GAAP lease accounting for what is now called a finance lease under ASC 842.

What is the difference between an Operating Lease and a Capital Lease?

The difference between an operating lease and a capital lease is the same as the difference between an operating lease and a finance lease.

What is an Embedded Lease?

An embedded lease relates to an asset that is included as part of a service contract or agreement. Such assets are usually classified as operating leases under ASC 842 and must now be recognized on the balance sheet.

What is a Right of Use Asset or ROU Asset?

The right of use asset is what a company recognizes on the balance sheet for both operating and finance leases under ASC 842, representing the right to use the leased asset.

What is a Sales Type Lease?

A sales-type lease is when the lease will transfer ownership of an underlying asset to the lessee by the time the lease term ends. The lease gives a lessee the option to purchase an underlying asset and the lessee is reasonably certain to exercise this option.

What is Sale Leaseback Accounting?

A sale and leaseback accounting transaction occurs when the seller transfers an asset to the buyer, and then leases the asset from the buyer. This arrangement most commonly occurs when the seller needs the funds associated with the asset being sold, despite still needing to occupy the space.

What is a Leasehold Improvement?

A leasehold improvement is a modification or enhancement made to a leased building space that has the right to use during the term of the lease. Leasehold improvements revert to the lessor at the expiration of the lease.

What is an Asset Retirement Obligation or ARO?

An asset retirement obligation (ARO) is a liability associated with the eventual retirement of a fixed asset. The liability is commonly a legal requirement to return a site to its previous condition. A business should recognize the fair value of an ARO when it incurs the liability and if it can make a reasonable estimate of the fair value of the ARO.

What is Deferred Rent?

Deferred rent occurs in lease accounting when the cash rent payments are different than its recognized financial statements and often occurs when a lessee is given free rent in one or more periods.

What is the ASC 842 Effective Date?

The ASC 842 effective date for public companies was for fiscal years beginning after December 15, 2018. The ASC 842 effective date non-public entities or private companies was for fiscal years beginning after December 15, 2021.

Who must comply with ASC 842?

ASC 842 compliance is mandatory under US GAAP guidance for all public and private companies that have lease obligations lasting longer than 12 months.

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