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Dual reporting challenges under IFRS 16 & ASC 842

September 27, 2018
Posted by Sarah Werner

The new lease accounting standards, IFRS 16/ASC 842, will bring trillions of dollars of lease liabilities onto company balance sheets and trigger significant accounting changes when they take effect in December 2018/January 2019. This is the second in a series of blogs where we look at potential areas of complexity and the required accounting treatments under the new lease accounting standards.   

Similar in appearance, different in practice:

The lease accounting standards, IFRS 16 and ASC 842 were designed in parallel by the IASB & FASB.  So, it’s not surprising that they seem to align in many ways.  However, the Boards’ views diverged over the course of the project and resulted in some significant differences.

In fact, while the two standards look very similar, in almost any real-world scenario, the correct application of IFRS 16 accounting and ASC 842 accounting will lead to different balance sheet numbers.  Companies may need to maintain different processes, controls and accounting systems for each framework to comply with the different lessee reporting requirements.This creates complexity for organizations that must report under both GAAPs.

IASB vs. FASB lease accounting standards – What’s the same and what’s different:

Both share essentially the same effective date (Dec 15, 2018 for ASC 842 and Jan 1, 2109 for IFRS 16).  Both require nearly all leases to be reported on lessees’ balance sheets as assets and liabilities and will require the creation of a right-of-use asset for most lessee contracts.

But it’s the differences that are more interesting:

  • Variable lease payments: The reassessments of indices, interest rates or rent reviews linked to lease payments are incorporated into the lease liability and right-of-use asset under IFRS 16 but not under ASC 842.
  • Lease classification: Dual reporters will have to separately track leases that have a different classification under US GAAP and IFRS because they will need to be accounted for differently. Under IFRS 16, lessees no longer classify their leases between operating and finance. Instead, all leases will be treated in a standard manner, similar to that of finance leases under current IAS 17.
  • Low value lease exemptions: IFRS 16 has an exemption for low values leases while ASC 842 does not.
  • Sublease accounting: The classification tests under IFRS 16 are with reference to the right-of-use asset, not the underlying asset.
  • Sale leaseback transactions: There are significant differences in the treatment of sale and leaseback transactions between the two standards.
  • Transition: Depending on the transition options and expedients selected, the transition data required may be significantly different across the two standards.

How a lease accounting solution can help address these issues

So, if your organization needs to report under both IFRS 16 and ASC 842, what should you look for in a solution to help you navigate the challenges of dual reporting?

First, it’s important to make sure the solution supports multi-GAAP reporting as standard.  With the Aptitude Lease Accounting Engine for example, each entity can be configured to report under any or all of the leasing standards ASC 842, IFRS 16, ASC 840 or IAS 17 and entering a lease once will produce multiple versions of the accounting.

Make sure the solution natively supports the differences between the standards and adjusts the lease liability (or not,) as required. ALAE applies entity specific accounting policies to inform the correct configuration of the settings to ensure that the accounting aligns with the entity’s reporting requirements.

Final Thoughts:

The IFRS and GAAP leasing standards certainly have a number of similarities and will both improve the ability of financial statement users to better understand an organization’s overall financial position. However, dual reporters must be aware of the differences between the US GAAP and IFRS standards and be prepared to address the complexities and questions that arise.

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This blog post was written by:

Sarah Werner
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