Bill Bosco 2017-07-26 06:13:51
How Do the Provisions of Topic 842 Compare with IFRS 16?
THE LEASE ACCOUNTING PROJECT began with the objective of converging on a worldwide set of rules. The idea of convergence was dropped when the FASB and IASB adopted different views on whether all leases were the same for lessee accounting. The FASB held the view that the economic characteristics of operating leases, based on a risks and rewards of ownership analysis, were significantly different from finance leases. As a result, the FASB maintained a two-lease model with different accounting for the two lease types reflecting the differences. The final U.S. and international lease accounting standards are not too far apart in most areas other than lessee accounting. The major objective of capitalizing most operating leases was achieved in both standards.
This article will identify key differences between the FASB’s Topic 842 and the IASB’s IFRS 16 that impact lessors and their structuring of leases to meet customer objectives. For in-depth analysis of this issue and commentary by the author, read an expanded version of this article on the ELFA website at www.elfaonline.org/LeaseAccountingTools.
Lessee Accounting Model
IFRS 16 has a lessee recognition and measurement exemption for leases of assets with values of less than $5,000, whereas Topic 842 does not have a specific small ticket exemption.
IFRS 16 considers all leases to be finance leases (formerly called capital leases); Topic 842 maintains a two-lease model in which all leases are capitalized but operating leases create nondebt liabilities and the lease cost is the average rent expense, as under current GAAP.
Both models require operating leases to be capitalized as an asset and liability measured at the present value of the lease payments as newly defined. Topic 842 recognizes the substance of leases for lessees; that is, operating leases, being executory contracts, do not create a debt obligation or ownership of the leased asset as a finance/capital lease does.
As a result, the basic accounting and presentation principles of FAS 13/Topic 840 are retained: The right-of-use asset and lease liability are separately reported and the liability is labeled an operating liability (not debt) and the profit and loss (P&L) cost is the straight-line average rent. IFRS 16 treats all lessee leases as finance/capital leases (the operating lease liability is considered debt and the P&L cost is front-ended).
Lessor Accounting Model
IFRS 16 does not distinguish between sales type and direct financing leases; therefore, IFRS 16 permits recognition of selling profit on direct financing leases at lease commencement even if third-party involvement, such as residual insurance, is used to achieve direct finance lease classification.
Variable Lease Payments
IFRS 16 requires reassessment of variable lease payments that depend on an index or a rate when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect). Topic 842 requires rebooking for a change in variable rents only when the lease is modified.
Sale and Leaseback Transactions
IFRS 16 does not include application guidance on whether the transfer of an asset in a sale and leaseback transaction is a sale other than to state that if the seller-lessee has a substantive repurchase option regarding the underlying asset, no sale has occurred. Topic 842 conforms to the Revenue Recognition standard to determine if the lessee is a principal in the sale/transfer of the asset. Topic 842 does not preclude fair market value purchase options where there are alternative assets, substantially the same as the transferred/ leased asset, readily available in the marketplace.
Private Companies
IFRS 16 does not have guidance specifically for private companies; however, Topic 842 permits an accounting policy election for private companies to use a risk-free rate to discount the lease liability for each lease.
Conclusion
There are other issues where there are differences between the new U.S. and international lease accounting standards, such as statement of cash flows presentation, disclosures, transition and impairment, that do not have business implications for lessors in structuring leases to meet customer needs. In any case, lessors should understand the rules changes in detail so that they understand changed lessee business concerns and how they should or might adjust their product offerings. Th e news rules create some landmines but there are also some opportunities for structuring in the rules. New Rules = New Ideas!
ELFA Advocacy on Lease Accounting Continues
ELFA members worked hard to successfully advocate for a workable lease accounting standard, which was released in February 2016. The release of the new standard did not mark the end of ELFA’s advocacy on this issue. The Financial Accounting Committee has established a Lease Accounting Resource Group to review questions and issues related to the new rules. This work group of experts will serve as a sounding board on implementation issues identified as problematic and will work to ensure that ELFA member concerns are communicated to and addressed by the standards-setters.
Bill Bosco is the Principal of Leasing 101 and a member of the ELFA Financial Accounting Committee. He has served as a member of the FASB/IASB Lease Project Working Group.
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