IFRS Lease Accounting
Under IFRS 16, all leases are treated as finance leases, requiring the recognition of a right-of-use asset and a lease liability. The distinction between operating and finance leases is eliminated under IFRS.
Aspect
Recognition
Measurement
Presentation
All Leases (IFRS 16)
Right-of-use asset and lease liability are recognized.
Right-of-use asset measured at cost; liability measured at the present value of lease payments.
Balance Sheet:
• Right-of-use asset under non-current assets.
• Lease liability split between current and non-current liabilities.
Income Statement:
• Depreciation (asset) and interest expense (liability) recognized, resulting in front-loaded total expenses.
US GAAP Lease Accounting
Under ASC 842, leases are classified as either operating or finance leases. The classification affects how leases are recognized and presented in financial statements.
Aspect
Recognition
Measurement
Expense Recognition
Presentation
Operating Lease
Right-of-use asset and lease liability are recognized.
Straight-line lease expense recognized over the lease term.
Single straight-line expense recorded over the lease term.
Balance Sheet:
• Right-of-use asset under non-current assets.
• Lease liability split between current and non-current liabilities.
Income Statement:
• Single straight-line expense recognized across the lease term.
Finance Lease
Right-of-use asset and lease liability are recognized.
Interest expense and amortization expense recognized separately.
Expenses split between interest on lease liability and amortization of the right-of-use asset.
Balance Sheet:
• Right-of-use asset under non-current
assets.
• Lease liability split between current and non-current liabilities.
Income Statement:
• Depreciation (asset) and interest expense (liability) recognized, resulting in frontloaded total expenses.
Classification of Finance vs. Operating Leases
Under US GAAP, leases are classified based on specific criteria, including ownership transfer, purchase options, lease term and present value of lease payments. IFRS eliminates this distinction, treating all leases as finance leases.
Criteria
Ownership Transfer
Purchase Option
Lease Term
Present Value
Finance Lease
Ownership transfers to the lessee at the end of the lease.
The lease contains a bargain purchase option that is reasonably certain to be exercised.
The lease term covers 75% or more of the asset’s economic life.
Present value of lease payments equals or exceeds 90% of the asset’s fair value.
Operating Lease
Ownership does not transfer to the lessee.
No such option exists.
The lease term is less than 75% of the asset's economic life.
Present value of lease payments is less than 90% of the asset's fair value.
Failed Sale Accounting in Sale-Leaseback Transactions
Failed sale accounting occurs when a sale-leaseback transaction does not meet the requirements for recognizing a sale under the applicable accounting standards. Instead, the transaction is accounted for as a financing arrangement.
Implications of Failed Sale Accounting
Aspect
Recognition
Revenue/ Proceeds
Balance Sheet Impact
Income Statement Impact
Seller (Lessee)
The seller does not derecognize the asset from its balance sheet.
Proceeds are treated as a financial liability (loan) rather than revenue.
The asset remains on the balance sheet, along with a corresponding liability.
Lease payments are divided into interest expense and principal repayment.
Buyer (Lessor)
The buyer records the transaction as a loan receivable, not an asset.
No lease revenue is recognized; lease payments are treated as payments of interest or loan repayments.
The asset is not recorded; instead, a financial asset (loan receivable) is recognized.
Income is recorded as interest income from the loan.
This document is for informational purposes only and should not be considered accounting advice.
Please consult your own advisor regarding your specific situation.
© 2025 Copyright W. P. Carey Inc.
Lease Accounting: IFRS vs. US GAAP
IFRS Lease Accounting
Under IFRS 16, all leases are treated as finance leases, requiring the recognition of a right-of-use asset and a lease liability. The distinction between operating and finance leases is eliminated under IFRS.
- Aspect: All Leases (IFRS 16)
- Recognition: Right-of-use asset and lease liability are recognized.
- Measurement: Right-of-use asset measured at cost; liability measured at the present value of lease payments.
- Recognition: Expenses split between interest on lease liability and depreciation of the right-of-use asset.
- Presentation:
- Balance Sheet:
- Right-of-use asset under non-current assets.
- Lease liability split between current and non-current liabilities
- Income Statement:
- Depreciation (asset) and interest expense (liability) recognized, resulting in front-loaded total expenses
US GAAP Lease Accounting
Under ASC 842, leases are classified as either operating or finance leases. The classification affects how leases are recognized and presented in financial statements.
Operating Lease
- Recognition: Right-of-use asset and lease liability are recognized.
- Measurement: Straight-line lease expense recognized over the lease term.
- Expense Recognition: Single straight-line expense recorded over the lease term.
- Presentation:
- Balance Sheet:
- Right-of-use asset under non-current assets.
- Lease liability split between current and non-current liabilities.
- Income Statement:
- Single straight-line expense recognized across the lease term.
Finance Lease
- Recognition: Right-of-use asset and lease liability are recognized.
- Measurement: Interest expense and amortization expense recognized separately
- Expense Recognition: Expenses split between interest on lease liability and amortization of the right-of-use asset.
- Presentation:
- Balance Sheet:
- Right-of-use asset under non-current assets.
- Lease liability split between current and non-current liabilities.
- Income Statement:
- Depreciation (asset) and interest expense (liability) recognized, resulting in front-loaded total expenses.
Classification of Finance vs. Operating Leases
Under US GAAP, leases are classified based on specific criteria, including ownership transfer, purchase options, lease term and present value of lease payments. IFRS eliminates this distinction, treating all leases as finance leases.
Finance Lease
- Ownership Transfer: Ownership transfers to the lessee at the end of the lease.
- Purchase Option: The lease contains a bargain purchase option that is reasonably certain to be exercised.
- Lease Term: The lease term covers 75% or more of the asset’s economic life.
- Present Value: Present value of lease payments equals or exceeds 90% of the asset’s fair value.
Operating Lease
- Ownership Transfer: Ownership does not transfer to the lessee.
- Purchase Option: No such option exists.
- Lease Term: The lease term is less than 75% of the asset's economic life.
- Present Value: Present value of lease payments is less than 90% of the asset's fair value.
Failed Sale Accounting in Sale-Leaseback Transactions
Failed sale accounting occurs when a sale-leaseback transaction does not meet the requirements for recognizing a sale under the applicable accounting standards. Instead, the transaction is accounted for as a financing arrangement.
Implications of Failed Sale Accounting
Seller (Lessee)
- Recognition: The seller does not derecognize the asset from its balance sheet.
- Revenue/Proceeds: Proceeds are treated as a financial liability (loan) rather than revenue.
- Balance Sheet Impact: The asset remains on the balance sheet, along with a corresponding liability.
- Income Statement Impact: Lease payments are divided into interest expense and principal repayment.
Buyer (Lessor)
- Recognition: The buyer records the transaction as a loan receivable, not an asset.
- Revenue/Proceeds: No lease revenue is recognized; lease payments are treated as payments of interest or loan repayments.
- Balance Sheet Impact: The asset is not recorded; instead, a financial asset (loan receivable) is recognized.
- Income Statement Impact: Income is recorded as interest income from the loan.
This document is for informational purposes only and should not be considered accounting advice. Please consult your own advisor regarding your specific situation.
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© 2025 Copyright W. P. Carey Inc.