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How lease accounting differs between IFRS 16 and ASC 842 for lessees and lessors

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Lease accounting defines how entities recognize rights to use assets and related obligations for payments. Both IFRS 16 and US GAAP (ASC 842) established right-of-use (ROU) asset models, replacing most previous off–balance sheet leases. The standards are largely converged for lessees but differ in classification, expense recognition patterns, low-value exemptions, and presentation. For lessors, accounting remains broadly consistent with earlier guidance, distinguishing operating and finance/sales-type leases.

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How leases are identified and scoped.

A contract contains a lease when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.The contract must grant both:

  1. The right to obtain substantially all economic benefits from use of the asset; and

  2. The right to direct how and for what purpose the asset is used.

IFRS 16 and ASC 842 share this control-based definition. Common examples include property, vehicles, equipment, servers, and office space.

Scope exceptions: biological assets, mineral rights, exploration assets, intangible assets (unless practical expedients), and certain short-term or low-value leases.

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Lessee accounting under IFRS 16.

1) Single on–balance sheet model.All leases (except short-term or low-value) are recognized with:

  • a right-of-use (ROU) asset, and

  • a lease liability measured at the present value of future lease payments.

Initial recognition:

  • Lease liability = PV of fixed payments + variable payments dependent on an index/rate + residual value guarantees + purchase/termination options reasonably certain to be exercised.

  • ROU asset = initial liability + direct costs + prepaid lease payments – lease incentives.

Journal entry (initial recognition):

  • Debit: Right-of-Use Asset 1,000,000

  • Credit: Lease Liability 1,000,000

Subsequent measurement:

  • ROU asset: depreciate on a straight-line basis over lease term or useful life if ownership transfers.

  • Lease liability: increase for interest, decrease for payments.

Example entries:Monthly depreciation (5-year term, 1,000,000 total)

  • Debit: Depreciation Expense 16,667

  • Credit: Accumulated Depreciation – ROU Asset 16,667

Monthly interest accretion (5% rate)

  • Debit: Interest Expense 4,200

  • Credit: Lease Liability 4,200

2) Exemptions:

  • Short-term leases: ≤12 months; account as expense.

  • Low-value assets: IFRS-only practical relief (e.g., small office equipment).

3) Presentation:ROU assets are shown with property, plant, and equipment; lease liabilities split between current and non-current.

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Lessee accounting under US GAAP (ASC 842).

1) Dual model: finance and operating leases.ASC 842 retains classification for lessees based on whether the lease transfers control of the asset similar to a purchase.

Finance lease criteria (any of the following):

  • Ownership transfers.

  • Bargain purchase option.

  • Lease term covers major part of asset’s life.

  • PV of lease payments ≈ fair value.

  • Asset specialized with no alternative use.

Operating lease: any other lease not meeting these criteria.

2) Recognition:Both finance and operating leases recognize ROU asset and liability at commencement using the same measurement principles as IFRS.

3) Expense pattern:

  • Finance lease: separate interest expense and amortization expense (front-loaded total).

  • Operating lease: single lease cost on straight-line basis (more level over term).

Example – operating lease entries (ASC 842):At commencement:

  • Debit: ROU Asset 1,000,000

  • Credit: Lease Liability 1,000,000

Monthly payment and expense recognition:

  • Debit: Lease Expense 20,000

  • Credit: Cash 20,000

  • Adjust ROU asset and liability for straight-line allocation (non-cash).

4) Short-term lease exemption:Practical expedient similar to IFRS; no low-value asset exemption.

5) Disclosure:Quantitative maturity tables, weighted-average discount rate, lease term, and qualitative discussion of variable lease costs.

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Comparative overview of lessee accounting.

Aspect

IFRS 16

ASC 842

Model

Single (all leases capitalized)

Dual (finance vs operating)

Expense pattern

Depreciation + interest (front-loaded)

Finance: similar; Operating: straight-line total

Short-term exemption

≤12 months

≤12 months

Low-value exemption

Yes

No

Discount rate

Implicit or incremental borrowing rate

Same

Modification accounting

Remeasure lease liability; adjust ROU asset

Same but classification may change

Presentation of lease expense

Depreciation + interest separately

Operating: single expense line

Impairment model

IAS 36 (recoverable amount)

ASC 360 (recoverability then fair value)

Transition

Modified/full retrospective

Similar, with package of practical expedients

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Lessor accounting under IFRS 16 and ASC 842.

1) Classification.Both standards retain dual model for lessors:

  • Finance/sales-type lease: transfers substantially all risks and rewards.

  • Operating lease: all others.

2) Finance lease lessor accounting:Derecognize the asset, recognize a net investment in lease (lease receivable + unguaranteed residual), and recognize interest income over time.

Journal entry at inception:

  • Debit: Net Investment in Lease 900,000

  • Credit: Underlying Asset 900,000

3) Operating lease lessor accounting:Continue recognizing the asset; recognize lease income on straight-line basis; depreciate asset normally.

4) IFRS nuance:For manufacturers/dealers, recognize selling profit or loss at commencement of a finance lease.Under GAAP, similar sales-type lease model applies; direct financing leases defer profit until interest income recognized.

5) Subleases:Classify sublease by reference to the ROU asset under both standards (not underlying asset).

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Measurement examples and journal entries.

Example – IFRS 16 lessee at commencement:ROU asset 500,000; lease liability 500,000.Annual payment 110,000 for 5 years; discount rate 5%.

Initial:

  • Debit: ROU Asset 500,000

  • Credit: Lease Liability 500,000

After one year:Interest = 25,000 (500,000×5%); payment 110,000 → principal reduction 85,000.

  • Debit: Interest Expense 25,000

  • Debit: Lease Liability 85,000

  • Credit: Cash 110,000


    Depreciation 100,000 (straight-line).

  • Debit: Depreciation Expense 100,000

  • Credit: Accumulated Depreciation – ROU 100,000

Example – ASC 842 operating lease expense pattern:Total payments 550,000 over 5 years; straight-line lease cost 110,000/yr.Record lease cost evenly each year and adjust liability/asset non-cash.

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Disclosure focus areas.

IFRS 16:

  • Maturity analysis of lease liabilities (IFRS 7 integration).

  • Expense split: short-term, low-value, variable, interest, depreciation.

  • Additions to ROU assets, carrying amount by class.

  • Total cash outflow for leases.

ASC 842:

  • Weighted-average lease term and discount rate.

  • Lease cost disaggregated (finance vs operating).

  • Maturity table for undiscounted payments.

  • Supplemental cash flow information (operating/non-cash activities).

Example disclosure table:

Lease Liability Maturity (USD)

Amount

Year 1

120,000

Year 2

115,000

Year 3

110,000

Year 4

105,000

Year 5

100,000

Total undiscounted payments

550,000

Less: PV adjustment

(50,000)

Lease Liability (Present Value)

500,000

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Journal entries summary.

Transaction

IFRS 16

ASC 842 (Finance)

ASC 842 (Operating)

Lease commencement

Dr ROU / Cr Liability

Same

Same

Payment

Dr Liability / Cr Cash

Same

Dr Lease Expense / Cr Cash (aggregate)

Depreciation

Dr Depreciation / Cr Acc. Dep.

Dr Amortization / Cr Acc. Amortization

n/a – included in lease expense

Interest

Dr Interest / Cr Liability

Same

n/a – implicit in single expense

Short-term exemption

Dr Lease Expense / Cr Cash

Same

Same

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Impact on financial performance and ratios.

Adoption of IFRS 16 or ASC 842 increases reported assets and liabilities, affecting:

  • Leverage ratios — higher debt-like obligations.

  • EBITDA — increases under IFRS 16 and GAAP finance leases because operating lease expense is replaced by depreciation and interest.

  • Operating cash flow — increases (principal payments now in financing).

  • ROA — generally lower due to higher assets.

  • Interest coverage — may worsen initially from accretion pattern.

Comparability across entities depends on lease mix and accounting policy (IFRS: single model; GAAP: dual model).

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Operational considerations.

Entities should maintain a central lease database with contract terms, renewal options, discount rates, and modification tracking. Integrate lease accounting software with the general ledger to calculate PVs, unwind interest, and produce disclosures. Monitor embedded leases in service contracts, particularly for data centers, transport, and logistics. Reassess extension/termination options when facts change, and update discount rates on remeasurement dates.

Strong controls over contract review, discount rate selection, and disclosure completeness ensure compliance and consistent comparability under IFRS 16 and ASC 842.

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