Unlike ASC 842 established by the FASB, IFRS lease accounting refers to the set of international standards that companies follow to account for leases in their financial disclosure. The standards are established by the IFRS, a not-for-profit organization responsible for creating global accounting standards, and then approved by the International Accounting Standards Board (IASB). More than 110 countries follow these standards when preparing and publishing their financial statements.
IFRS lease accounting is different than the Generally Accepted Accounting Principles (GAAP) used in the United States. IFRS lease accounting is principle based rather than rules based (like GAAP) and could allow for different interpretations of the same tax situations.
In January of 2016, the IASB established new lease accounting standards that changed the way companies account for leases in their financial disclosure. With the new lease accounting standards, dual accounting models currently used are replaced with a single on-balance sheet accounting model.
The goal of IFRS 16 is to report information in a way that provides a realistic representation of lease transactions and allows for better assessment of cash flow from leases. Therefore, a lessee needs to recognize assets and liabilities from leases while lessor accounting continues to classify leases similar to current practices.
For lessees, all liabilities and assets with a term greater than 12 months must be recognized. This includes both the right of use asset and the liability asset representing the requirement of payment. Right of use assets are measured like non-financial assets and liabilities are measured like other financial liabilities. The impact on a lessee is that it must now recognize depreciation for the right of use asset as well as interest on the lease liability. In the cash flow statement, the total amount paid is separated into principal and interest keeping with IAS 7 reporting standards.
All companies need to consider the extent of the new IFRS 16 lease accounting standard’s impacts and its implications on the business as a whole.