The biggest difference between IFRS 16 and ASC 842 is lessee classification. ASC 842 keeps finance and operating leases, so operating leases carry a straight-line lease cost. IFRS 16 uses a single lessee model, so lessees record depreciation and interest on nearly every lease. IFRS 16 also exempts low-value assets; ASC 842 does not.
ASC 842 is one of the most important lease accounting standards in the US. It requires all leases to be recorded as assets and liabilities on an organization’s balance sheet.
All organizations that follow generally accepted accounting principles (GAAP) and lease assets from other organizations are called lessees, and therefore are required to classify leases as either finance or operating leases. Organizations leasing assets to others are called lessors, and record leases as either sales-type, direct financing, or operating leases.
The IFRS 16 standard requires lessees to recognize most leases on the balance sheet in the form of assets and liabilities. Lessors classify leases as either finance leases or operating leases and account for them accordingly.
Under IFRS 16, lessees classify leases as finance leases, as the IASB eliminated the concept of the operating lease for lessees. Lessors record leases as either a finance lease or operating lease.
Lessees following ASC 842 classify their leases as either operating or finance. Lessors following ASC 842 record leases as sales-type, direct financing, or operating leases.
Under ASC 842, lessees have the option of including leases shorter than 12 months in their reporting, while both standards let a lessee elect not to recognize leases with a term of 12 months or less on the balance sheet. IFRS 16 also offers a low-value asset exemption, which ASC 842 does not have.
| Topic | ASC 842 (FASB) | IFRS 16 (IASB) |
|---|---|---|
| Lessee classification | Finance or operating | Single lessee model |
| Lessee expense pattern | Operating: straight-line single lease cost. Finance: amortization plus interest | Depreciation plus interest for all recognized leases |
| Short-term lease exemption | Yes, 12 months or less, elected by class of asset | Yes, 12 months or less, elected by class of asset |
| Low-value asset exemption | No | Yes, lease by lease |
| Risk-free discount rate option | Yes, for entities that are not public business entities | No |
| Index-based payment changes | Not remeasured on index changes alone | Lease liability remeasured when index-driven payments change |
| Lessor classification | Sales-type, direct financing or operating | Finance or operating |
As both of these lease standards require lessees to record leases on their balance sheet, IFRS 16 and ASC 842 provide investors and users of financial statements a basis to understand the effect of liabilities related to leases. Before ASC 842 and IFRS 16, operating leases stayed off the balance sheet under ASC 840 and IAS 17.
Both IFRS 16 and ASC 842 have qualitative and quantitative disclosure requirements for lessees.
IFRS 16 quantitative disclosure requirements include:
The qualitative disclosures for IFRS 16 leases include:
Under IFRS 16, a lessee has to recognize its right-of-use as well as any lease liability that represents its obligation to make its lease payments.
Under ASC 842, a lessee has to classify a lease as either finance or operating and record lease liabilities as well as right-of-use assets separately from each other and from other assets and liabilities on their balance sheet.
Under both IFRS 16 and ASC 842, leases shorter than 12 months are not required to be recorded on the balance sheet.
Under ASC 842, lessees may make a policy election to exclude leases of 12 months or less from being recorded on the balance sheet.
For IFRS 16, an entity does not need to reassess whether a contract is or contains a lease. Instead, as a practical expedient, an entity can apply this standard to contracts as they were previously identified, and can choose not to apply the standard to contracts that were not previously identified as a lease. Lessees can apply this standard retrospectively to each prior reporting period or retrospectively with the cumulative effect recorded.
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ASC 842 is the FASB's lease accounting standard under U.S. GAAP. It requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for most leases and to classify each lease as a finance or operating lease.
IFRS 16 is the IASB's lease accounting standard. It requires lessees to recognize most leases on the balance sheet using a single lessee accounting model. Lessors classify leases as either finance leases or operating leases.
Under IFRS 16, lessees use a single accounting model and do not classify leases as operating or finance. Under ASC 842, lessees classify leases as finance or operating. Lessors under IFRS 16 classify leases as finance or operating; lessors under ASC 842 classify them as sales-type, direct financing, or operating.
Both standards bring most leases onto the balance sheet as a right-of-use asset and a lease liability. Before ASC 842 and IFRS 16, operating leases stayed off the balance sheet under ASC 840 and IAS 17.
Both standards measure the lease liability at the present value of lease payments and build the ROU asset from it. The difference is in expense: ASC 842 lessees recognize a straight-line single lease cost for operating leases, while IFRS 16 lessees recognize depreciation and interest for all recognized leases.
Both standards let a lessee elect not to recognize leases with a term of 12 months or less on the balance sheet. IFRS 16 also offers a low-value asset exemption, which ASC 842 does not have.
ASC 842 requires lessees to identify whether the lease modification grants an additional right of use at standalone pricing. If it does, the modification is recorded as a new lease. If it does not, the original lease is modified, and the discount rate, payments and classification may need to be updated. IFRS 16 follows a similar approach: a modification is a separate lease if it adds the right to use one or more assets at standalone pricing; otherwise the lease liability and ROU asset are remeasured.
Only if the company reports under IFRS, such as a US subsidiary that reports to a parent using IFRS. US companies that report under U.S. GAAP apply ASC 842.
Lessee classification. ASC 842 keeps finance and operating leases, so operating leases show a straight-line single lease cost. IFRS 16 uses one lessee model, so lessees recognize depreciation and interest, which puts more expense in the early years of a lease.
No. ASC 842 has a short-term lease exemption but no low-value asset exemption. IFRS 16 has both.
