FINANCIAL WATCH By Bill Bosco Comparing the New Lease Accounting Standards How Do the Provisions of Topic 842 Compare with IFRS 16? T vergence 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 . 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 la-beled 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). HE LEASE ACCOUNTING PROJECT began with the objective of converging on a worldwide set of rules. The idea of con-Lessee Accounting Model IFRS 16 has a lessee recognition and measurement exemp-tion for leases of assets with values of less than $5,000, where-as 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 ex-pense, 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, be-ing executory contracts, do not create a debt obligation or ownership of the leased asset as a finance/capital lease does. 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 commence-ment even if third-party involvement, such as residual in-surance, 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. 36 JULY/AUGUST/SEPTEMBER 2017 EQUIPMENT LEASING & FINANCE MAGAZINE