1/14/12 US GAAP vs. IFRS: the basics, March 2010 - Leases - Ernst & Young - U…
1/3ey.com/US/en/…/US-GAAP-vs--IFRS--the-basics--March-2010---Leases
Tw itter
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.
Search
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
1/14/12 US GAAP vs. IFRS: the basics, March 2010 - Leases - Ernst & Young - U…
2/3ey.com/US/en/…/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
1/14/12 US GAAP vs. IFRS: the basics, March 2010 - Leases - Ernst & Young - U…
3/3ey.com/US/en/…/US-GAAP-vs--IFRS--the-basics--March-2010---Leases
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