How to account for leases under IFRS and US GAAP: Classification, measurement, and reporting differences

Lease accounting underwent major reforms in both IFRS and US GAAP, with the introduction of IFRS 16 and ASC 842, respectively. These standards were designed to bring most leases onto the balance sheet and improve transparency of lease obligations. While both frameworks now require lessees to recognize right-of-use (ROU) assets and lease liabilities, there remain critical differences in lease classification, expense recognition, and lessor accounting that affect financial statements and ratios.

All leases must be identified and classified at inception based on control and economic substance.

Both standards define a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This includes most traditional rental agreements for property, equipment, or vehicles.

Under IFRS 16:

• All leases (with limited exceptions) are treated the same way: a right-of-use asset and lease liability are recognized.

• There is no distinction between operating and finance leases for lessees.

Under US GAAP (ASC 842):

• Leases are classified as either operating or finance leases.

• Both types are recorded on the balance sheet, but income statement treatment differs:

  • Operating lease: Single lease expense (straight-line).

  • Finance lease: Interest and amortization expense shown separately.

Initial measurement involves calculating the present value of lease payments.

Under both IFRS 16 and ASC 842, the initial lease liability is measured at the present value of future lease payments, discounted using the rate implicit in the lease or the incremental borrowing rate if the implicit rate is not readily available.

The right-of-use asset includes:

• The initial lease liability

• Lease payments made at or before commencement

• Initial direct costs

• Any estimated restoration costs (asset retirement obligations)

Measurement item	IFRS 16	US GAAP (ASC 842)
Lease liability	PV of lease payments	PV of lease payments
ROU asset	Lease liability ± adjustments	Lease liability ± adjustments
Discount rate	Implicit or incremental borrowing rate	Implicit or incremental borrowing rate

Subsequent measurement differs in expense recognition for lessees.

IFRS 16 requires all leases to be accounted for similarly to finance leases under previous standards:

• Depreciation of ROU asset over lease term

• Interest expense on lease liability

• Results in front-loaded expense pattern

US GAAP distinguishes between operating and finance leases:

• Finance lease: Same as IFRS (separate interest and amortization)

• Operating lease: Total lease cost is presented as a single lease expense, straight-lined over the term

This creates divergence in net income pattern and EBITDA:

• IFRS: Higher EBITDA (interest below operating income)

• US GAAP: Operating lease expense reduces EBITDA

Low-value and short-term lease exemptions apply differently.

Both standards allow certain leases to be excluded from balance sheet recognition:

• IFRS 16:

  • Short-term leases (≤12 months) and low-value leases (typically under USD 5,000) can be expensed directly

• US GAAP:

  • Only short-term leases (≤12 months) may be excluded from recognition

  • No low-value lease exemption

Exemption type	IFRS 16	US GAAP (ASC 842)
Short-term leases	Optional exemption	Optional exemption
Low-value leases	Allowed (qualitative)	Not allowed

Lessor accounting remains similar to previous guidance, with differences in classification.

Under IFRS 16, lessor accounting remains largely unchanged from IAS 17:

• Classify leases as operating or finance leases

• Finance lease: Derecognize asset, recognize net investment in lease

• Operating lease: Continue to recognize asset and record lease income

US GAAP (ASC 842) also retains classification of leases by lessors as:

1. Sales-type lease

2. Direct financing lease

3. Operating lease

However, the classification criteria under US GAAP are more detailed, involving:

• Transfer of ownership

• Bargain purchase options

• Lease term relative to asset life

• Present value of payments

• Specialized nature of the asset

Disclosure requirements enhance transparency around lease obligations and assumptions.

Both IFRS 16 and ASC 842 require extensive disclosures, including:

• Breakdown of lease expenses

• Maturity analysis of lease liabilities

• Discount rates and assumptions

• Changes in ROU assets and liabilities

• Cash flow impacts (operating vs. financing)

IFRS 16 focuses on aggregated lease expense, maturity profile, and key judgments made (e.g., term extension assumptions).

US GAAP provides detailed requirements for tabular reconciliation and income statement impacts by lease type.

Key differences between IFRS and US GAAP for lease accounting.

Aspect	IFRS 16	US GAAP (ASC 842)
Lessee model	Single model (finance lease approach)	Dual model: operating vs. finance
Income statement impact	Depreciation + interest (front-loaded)	Straight-line for operating leases
EBITDA impact	Higher EBITDA (no lease expense)	Lower EBITDA for operating leases
Low-value lease exemption	Allowed	Not allowed
Lessor classification	Operating vs. finance	Operating, direct financing, sales-type
Disclosure emphasis	Aggregate totals + key judgments	Lease type reconciliation + maturity analysis

The lease accounting models under IFRS and US GAAP are converged in scope but diverged in presentation, particularly in lessee accounting. These differences impact profitability metrics, financial ratios, and comparability, making it essential for multinational companies, analysts, and auditors to adjust interpretations accordingly when evaluating financial reports prepared under different frameworks.

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