Multi-national companies need to comply with both IASB and FASB and are keeping a close eye on new lease accounting standards. Both ASC 842 and IFRS 16 require nearly all leases to be reported on the balance sheets as assets and liabilities. Both capitalize all leases on the balance sheet. However, the entities do take a different stance on a few aspects of lease accounting methodology.
For example, ASC 842 offers two classification types:
- Operating leases with a straight-line expense recognition pattern
- Finance leases with a frontloaded expense recognition pattern split into interest and depreciation, much like capital lease amortization under prior guidance
Meanwhile, IFRS 16 requires one classification method for all leases;
- Accelerated expense recognition similar to FASB’s finance classification
Other differences between FASB and IASB include:
- low-value exemptions (IFRS 16 set a $5,000 threshold, ASC 842 didn’t specify)
- index-based variable payments (IFRS requires re-measurement when the index changes)
- transition approach
- initial right-of-use asset measurement
- practical expedients
There are many similarities on Day 1 of lease accounting compliance. However, moving forward the difference methodologies may represent significant implementation issues for dual reporters. These entities will need to maintain different processes and controls for each to comply with the diverse reporting requirements.
For a successful approach to lease accounting compliance, international companies with an obligation to report using multiple methodologies need a comprehensive lease accounting software solution that can track and calculate the data necessary for compliance reporting. Quality lease accounting software vendors should be able to demo IFRS 16 functionality along with ASC 842, and if dual reporting is a requirement, don’t forget to ask about functional currency capability. The two usually go hand in hand.