IFRS 16 vs ASC 842 Guide: Comparison and Key Differences

Introduction

IFRS 16 is the international accounting standard for leases, while ASC 842 is the US GAAP equivalent. Both standards require lessees to recognise most leases in the statement of financial position. While similar, the two standards have fundamental differences in a few key areas.

IFRS 16 uses a single model for almost all leases, with right-of-use assets and lease liabilities recorded and depreciated consistently, whereas ASC 842 retains a dual model, distinguishing between finance and operating leases. Other differences include the treatment of low-value leases, discount rates, lease modifications, and subleases.

This article provides a detailed comparison, highlighting these and other key distinctions to help accounting professionals navigate the practical implications of each framework.

1. Lessee Accounting: Single Model vs Dual Model

The most fundamental difference lies in the treatment of leases by lessees.

Under IFRS 16, there is a single model. All leases, except those that are short-term or of low value, must be accounted for in the same way: the lessee recognises a right-of-use asset (ROUA) and a corresponding lease liability. The asset is depreciated, while interest accrues on the liability.

By contrast, ASC 842 retains the older dual model. Leases may be classified as either finance or operating:

• Finance lease: the pattern mirrors IFRS 16, with depreciation and interest recognised separately.
• Operating lease: the lessee records a single straight-line lease expense. The ROUA and lease liability are amortised to produce a level expense profile. The expense consists of two components: interest on the lease liability, with the balancing figure being depreciation of the right-of-use asset.

Take note that under ASC 842 operating leases, the lessee still recognises a ROUA and lease liability.

2. No Low-Value Exemption under ASC 842

Both standards provide a short-term lease exemption, but only IFRS 16 allows a specific exemption for low-value leases, such as office furniture or tablets.
There is no exemption for low-value assets under ASC 842.

3. Lessor Accounting Models

For lessors, both standards classify leases as finance or operating, but ASC 842 further splits finance leases into sales-type and direct financing leases:

• Sales-type lease: arises where the lessor is effectively selling the underlying asset.
• Direct financing lease: reflects more of a financing arrangement without a dealer’s profit margin.

IFRS 16 does not create this distinction. It introduces the concept of a manufacturer or dealer lessor, which requires different treatment. The overall effect is similar to ASC 842 sales-type leases.

4. Remeasurement of Leases

• IFRS 16: requires remeasurement whenever payments change due to an index or rate, such as CPI.
• ASC 842: specifically exempts such changes from remeasurement.

This means lessees under IFRS 16 typically revisit their lease liabilities more often than under US GAAP.

5. Scope Differences

Another area where ASC 842 diverges is in scope. US GAAP excludes more arrangements from the outset. Leases of intangible assets, inventory, and assets under construction are outside the scope of ASC 842.

IFRS 16 is broader, excluding only intangible assets if they fall within the licensing agreements provisions of IAS 38.
This difference means certain arrangements recognised as leases under IFRS 16 would never fall into ASC 842.

6. Purchase Options and Short-Term Leases

The treatment of purchase options can produce different outcomes.

• IFRS 16: any lease containing a purchase option cannot qualify as a short-term lease.
• ASC 842: if the lessee is not reasonably certain to exercise the option, the lease may still meet the short-term definition.

7. Discount Rates

• IFRS 16: requires use of the rate implicit in the lease, if known, or otherwise the lessee’s incremental borrowing rate.
• ASC 842: private companies may elect to use the risk-free rate, determined by asset class. This simplifies application for smaller entities, but can significantly increase reported lease liabilities.

8. Right-of-Use Asset Measurement

• IFRS 16: requires inclusion of restoration or dismantling costs in the cost of the asset.
• ASC 842: excludes these amounts, recognising them separately.

9. Lease Modifications When Lease Term is Shortened

• IFRS 16: a modification that shortens the lease term is treated as a decrease in the scope of the lease. The lessee reduces both the lease liability and the ROUA proportionately, recognising a gain or loss.
• ASC 842: the same modification is not considered a decrease in scope. It is treated like any other modification, adjusting the lease liability and ROUA directly.

10. Initial Direct Costs

Both standards allow capitalisation of initial direct costs, but the scope differs:

• IFRS 16: prohibits capitalisation for manufacturer or dealer lessors.
• ASC 842: allows capitalisation for direct financing leases, but not for sales-type leases.

11. Definition of Lease Payments

IFRS 16 explicitly includes guaranteed residual value (GRV) in its definition of lease payments. Guarantees from the lessee, related parties, or independent third parties are all included, provided the guarantor is financially capable of performing.

ASC 842 does not mention GRV in its definition of lease payments but still incorporates it into the measurement of the lease receivable, and therefore also the net investment in the lease.

The difference doesn’t cause significant practical implications.

12. Definition of Lease Receivable

ASC 842 explicitly defines a “lease receivable” as the present value of lease payments plus any residual value guarantees. This amount, combined with the present value of any unguaranteed residual value, forms the net investment in the lease.

IFRS 16 does not use the term “lease receivable” directly, although it describes the same economics in its definition of the net investment in the lease.

13. Sale-and-Leaseback Transactions

Sale-and-Leaseback transactions also have slight differences:

• IFRS 16: the seller-lessee recognises a ROUA only for the portion retained, recognising gain or loss only for the transferred rights. Off-market terms are adjusted.
• ASC 842: the ROUA is measured like any other lease, and the full gain or loss between sale proceeds and carrying amount is recognised.

14. Subleases

• IFRS 16: an intermediate lessor classifies the sublease by reference to the ROUA under the head lease, often resulting in a finance lease classification.
• ASC 842: looks through to the underlying asset, so most subleases are treated as operating leases.

Conclusion

While IFRS 16 and ASC 842 share some similarities, there are key differences in lessee accounting, scope, lease payments, discount rates, ROUA measurement, lessor models, and lease modifications. Understanding these differences is critical for accurate lease accounting and compliance under each framework.

For clarification, guidance, or feedback, reach out at insight@leash.co.za.