That’s why we have prepared this quick reference that explains the IFRS and FASB changes in the new standards. You can also see the differences between the IFRS changes and FASB changes to lease accounting.
Learn more: Start Now to Spend Less on FASB & IASB Lease Accounting Changes
Scope includes leases of all property, plant, and equipment.
Scope includes leases of all assets.
Under both standards, A lease contract must convey the right to control the use of a specifically identified asset for a specified period of time. A customer controls an identified asset when the customer has both the right to obtain substantially all of the economic benefits from its use and the right to direct that use.
A lease is defined as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”
A lease is defined as a “contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.”
A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise.
A lessee may recognize the payments on such a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.
A short-term lease is defined as a lease that has a lease term of 12 months or less and does not include a purchase option.
A lessee may recognize the payments on a short-term lease on a straight-line basis over the lease term (in a manner similar to its recognition of an operating lease today). These leases would not be reflected on the lessee’s balance sheet.
Under both standards: As of the lease commencement date, a lessee will recognize both:
Lease classification
A lessee will classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:
FASB operating lease and finance lease treatment
For a finance lease, the ROU asset is generally amortized on a straight-line basis. This amortization, when combined with the interest on the lease liability, results in a front-loaded expense profile in which interest and amortization are presented separately in the income statement.
For an operating lease a straight-line expense profile that is presented as a single line item in the income statement.
All leases will be recorded as per the FASB’s finance lease approach when amortizing the ROU asset.
Lease term is the non-cancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option or in which the exercise of those options is controlled by the lessor.
Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee, (2) a contract term obliges the lessee to exercise (or not exercise) an option to extend or terminate the lease, or (3) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.
A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.
Lease term is the noncancelable period in which the lessee has the right to use an underlying asset together with optional periods for which it is reasonably certain that the lessee will exercise the renewal option or not exercise the termination option.
Lessees will be required to reassess the lease term after lease inception if (1) there is a significant event or change in circumstances that is directly attributable to the actions of the lessee or (2) the lessee elects to exercise (or not exercise) an option to renew or terminate the contract that it had previously determined was not reasonably certain to be exercised.
A lessor is not required to reassess the lease term unless the lease is modified and the modified lease is not a separate contract.
Under both standards, lease payments include:
Lease payments do not include variable lease payments that are based on the usage or performance of the underlying asset (e.g., a percentage of revenues).
Variable payments based on an index or rate would only be reassessed when the lease obligation is reassessed for other reasons (e.g., change in the lease term, modification).
Variable payments based on an index or rate would be reassessed whenever there is a change in contractual cash flows (e.g., the lease payments are adjusted for a change in the CPI).
Under both standards, lessees use the rate charged by the lessor if the rate is readily determinable. If the rate is not readily determinable, lessees will use their incremental borrowing rate as of the date of lease commencement.
Private-company lessees can elect to use a risk-free rate.
No exemptions provided for private-company lessees.
Under both standards, a lease modification is any change to the contractual terms and conditions of a lease.
A lessee will account for a lease modification as a separate contract (i.e., separate from the original lease) when the modification (1) grants the lessee an additional ROU asset and (2) the price of the additional ROU asset is commensurate with its stand-alone price.
Lessees would account for a lease modification that is not a separate contract by using the discount rate as of the modification effective date to adjust the lease liability and ROU asset for the change in the lease payments.
The modification may result in a gain or loss if the modification results in a full or partial termination of an existing lease.
The intermediate lessor would classify a sublease by using the underlying asset of the master lease.
The intermediate lessor would classify a sublease by using the ROU asset of the master lease.
The transaction would not be considered a sale if (1) it does not qualify as a sale under ASC 606 or (2) the leaseback is a finance lease.A repurchase option would result in a failed sale unless (1) the exercise price of the option is at fair value and (2) there are alternative assets readily available in the marketplace. If the transaction qualifies as a sale, the entire gain on the transaction would be recognized.
The transaction would not be considered a sale if it does not qualify as a sale under IFRS 15.A repurchase option would always result in a failed sale. For transactions that qualify as a sale, the gain would be limited to the amount related to the residual portion of the asset sold. The amount of the gain related to the underlying asset leased back to the lessee would be offset against the lessee’s ROU asset.
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