Under both IFRS 16 and ASC 842 lessees are required to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new accounting standards call for lessees to identify and separately account for lease and non-lease components in such arrangements. A lessee can then elect to account for the single lease components by class of underlying asset.
Except for short-term leases, lessees must recognize a right-of-use asset and a lease liability on their balance sheet upon lease commencement for all lease arrangements under both IFRS 16 and ASC 842. The ROU asset is initially recognized at the amount of the lease liability plus any initial direct costs incurred by the lessee, where the lease liability equals the present value of the lease payments to be made over the lease term. Adjustments may also be required for lease incentives, payments at or prior to commencement, and restoration obligations or similar.
| Lessee Recognition of a ROU Asset | ||||
|---|---|---|---|---|
| Date | Right-of-Use Asset | xxxx | ||
| Liability for ROU Asset | xxxx | |||
| To record the ROU asset at inception | ||||
Two key differences in the application of the US GAAP and IFRS lease accounting standards by lessees are:
- Under IFRS lessees may elect on a lease-by-lease basis not to recognize leases when the value of the underlying asset is low (generally items with a value of USD 5,000 or less), while under ASC 842 there is no recognition exemption for leases based on the leased asset’s value; and
- Whereas IFRS 16 applies to the lease of certain intangible assets, all leases of intangible assets are excluded from the scope of ASC 842.
Lessors classify the right-of-use assets of lessees either as operating leases or finance leases, depending on whether they transfer substantially all the risks and rewards incidental to ownership of the underlying assets.