US issues new rules for lease accounting - All leases to be capitalised but different rules for operating leases

What started out as a joint project between the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) to change lease accounting, has culminated in two separate leasing standards with generally similar, but in some significant respects, different proposals. This may have significant implications for entities operating across multinational jurisdictions.

In February Accounting News we summarised the major implication for lessees of the IASB’s new standard on leases (IFRS 16 Leases).

On 25 February 2016, the FASB issued Accounting Standard Update 2016-02 Leases (Topic 842) which essentially has the same effective date as IFRS 16 for public companies (years beginning on or after 15 December 2018, i.e. 1 January 2019 for most companies). Non-public companies will have an extra year to adopt these changes (i.e. from 15 December 2019).

Similarities to IFRS 16

Common to IFRS 16 and ASU 2016-02 (Topic 842) is that:

  • Lessees to capitalise all leases on balance sheet if term is greater than 12 months
  • Lease expenses to be broken down into interest expense and amortisation expense for right-of-use assets
  • Additional disclosures will be required to help users understand the amount, timing and uncertainty of cash flows arising from leases.

Main differences

The main differences between IFRS 16 and ASU 2016-02 (Topic 842) include:

  • Retention of ‘operating’ and ‘finance’ lease classification for leased assets by lessees
  • ‘Operating’ leases to have straight-line expenses rather than front-end loaded expenses under IFRS 16
  • No exemption for low value items under the ASU
  • Private companies can use risk-free rates when discounting the present value of lease liabilities
  • IFRS 16 allows either full or modified retrospective restatement on transition whereas the ASU only permits modified retrospective restatement.

These differences mean that the financial statements of entities applying USGAAP will not be comparable with those applying IFRS 16 for leases. This is because the straight-line operating lease expenses under USGAAP will result in higher EBITDA in early years of a lease and lower EBITDA in later years when compared with the accounting treatment under IFRS 16.