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1/14/12 US GAAP vs. IFRS: the basics, March 2010 - Leases - Ernst & Young - U…

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Similarities

The overall accounting for leases under US GAAP and IFRS (ASC 840 Accounting for Leases (formerly FAS 13) and IAS 17 Leases,

respectively) is similar, although US GAAP has more specif ic application guidance than IFRS.

Both focus on classifying leases as either capital (IAS 17 uses the term “f inance”) or operating, and both separately discuss lessee

and lessor accounting.

Lessee accounting(excluding real estate)

Both US GAAP and IFRS require the party that bears substantially all the risks and rew ards of ow nership of the leased property to

recognize a lease asset and corresponding obligation, and specify criteria (ASC 840) or indicators (IAS 17) to make this determination

(that is, w hether a lease is capital or operating).

The criteria or indicators of a capital lease are similar in that both standards include the transfer of ow nership to the lessee at the end

of the lease term and a purchase option that, at inception, is reasonably expected to be exercised.

Further, ASC 840 requires capital lease treatment if the lease term is equal to or greater than 75% of the asset’s economic life, w hile

IAS 17 requires such treatment w hen the lease term is a “major part” of the asset’s economic life. ASC 840 specif ies capital lease

treatment if the present value of the minimum lease payments exceeds 90% of the asset’s fair value, w hile IAS 17 uses the term

“substantially all” of the fair value.

In practice, w hile ASC 840 specif ies bright lines in certain instances (for example, 75% of economic life), IAS 17’s general principles

are interpreted similarly to the bright line tests. As a result, lease classif ication is often the same under ASC 840 and IAS 17.

Under both US GAAP and IFRS, a lessee w ould record a capital (f inance) lease by recognizing an asset and a liability, measured at the

low er of the present value of the minimum lease payments or fair value of the asset.

A lessee w ould record an operating lease by recognizing expense on a straight-line basis over the lease term. Any incentives under

an operating lease are amortized on a straight line basis over the term of the lease.

Lessor accounting(excluding real estate)

Lessor accounting under ASC 840 and IAS 17 is similar and uses the above tests to determine w hether a lease is a sales-type/direct

f inancing lease or an operating lease.

ASC 840 specif ies tw o additional criteria (that is, collection of lease payments is reasonably expected and no important uncertainties

surround the amount of unreimbursable costs to be incurred by the lessor) for a lessor to qualify for sales-type/direct f inancing lease

accounting that IAS 17 does not have.

Although not specif ied in IAS 17, it is reasonable to expect that if these conditions exist, the same conclusion may be reached under

both standards. If a lease is a sales-type/direct f inancing lease, the leased asset is replaced w ith a lease receivable. If a lease is

classif ied as operating, rental income is recognized on a straight-line basis over the lease term and the leased asset is depreciated by

the lessor over its useful life.

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Home > Serv ices > Assurance > Accounting and Financial Reporting > US GAAP vs. IFRS: the basics, March 2010

US GAAP vs. IFRS: the basics, March 2010

Leases



Significant differences

US GAAP IFRS

Lease of land and

building

A lease for land and buildings that

transfers ow nership to the lessee

or contains a bargain purchase

option w ould be classif ied as a

capital lease by the lessee,

regardless of the relative value of

the land.

If the fair value of the land at

inception represents 25% or more

of the total fair value of the lease,

the lessee must consider the land

and building components

separately for purposes of

evaluating other lease

classif ication criteria. (Note: Only

the building is subject to the 75%

and 90% tests in this case.)

The land and building elements of

the lease are considered

separately w hen evaluating all

indicators unless the amount that

w ould initially be recognized for

the land element is immaterial, in

w hich case they w ould be treated

as a single unit for purposes of

lease classif ication. There is no

25% test to determine w hether to

consider the land and building

separately w hen evaluating certain

indicators.

Recognition of a

gain or loss on a

sale and leaseback

w hen the

leaseback is an

operating leaseback

If the seller does not relinquish

more than a minor part of the right

to use the asset, gain or loss is

generally deferred and amortized

over the lease term. If the seller

relinquishes more than a minor part

of the use of the asset, then part

or all of a gain may be recognized

depending on the amount

relinquished. (Note: Does not apply

if real estate is involved as the

specialized rules are very

restrictive w ith respect to the

seller’s continuing involvement and

they may not allow for recognition

of the sale.)

Gain or loss is recognized

immediately, subject to adjustment

if the sales price differs from fair

value.

Recognition of gain

or loss on a sale

leaseback w hen

the leaseback is a

capital leaseback

Generally, same as above for

operating leaseback w here the

seller does not relinquish more

than a minor part of the right to use

the asset.

Gain or loss deferred and

amortized over the lease term.

Other differences include:

1. the treatment of a leveraged lease by a lessor under ASC 840 (IAS 17 does not have such classif ication)

2. real estate sale-leasebacks

3. real estate sales-type leases

4. leases of land and

5. the rate used to discount minimum lease payments to the present value for purposes of determining lease classif ication and

subsequent recognition of a capital lease, including in the event of a renew al.

Convergence

The Boards are jointly w orking on a long-term convergence project on lease accounting w ith an overall objective of creating a common

standard on lease accounting to ensure that the assets and liabilities arising from lease contracts are recognized on the balance sheet.

The Boards have published a discussion paper that sets out their preliminary view s on accounting for leases by lessees and includes

a high-level discussion of lessor accounting issues. An exposure draft of a new standard that addresses accounting for leases from

the perspective of the lessor and the lessee is expected to be issued in 2010.

Inside this comparison



guide

US GAAP and IFRS

convergence

Business combinations

Consolidations, joint

venture accounting

and equity method

investees

Earnings per share

Employee benefits

other than share-based

payments

Financial instruments

Financial statement

presentation

Foreign currency

matters

Impairment of long-

lived assets, goodwill

and intangible assets

Income taxes

Intangible assets

Interim financial

reporting

Inventory

Leases

Long-lived assets

Provisions and

contingencies

Related parties

Revenue recognition

Segment reporting

Share-based payments

Subsequent events

Other resources

Download US GAAP

vs. IFRS: the basics,

March 2010 (608

KB PDF) as a printable

document.

FASB / IASB

Memorandum of

understanding

updated

Audit Committees face

unprecedented

change

US / IFRS resources

us gaap vs ifrs

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