IFRS 16 vs ASC 842: Where the Two Lease Standards Part Ways

IFRS 16 vs ASC 842 comes down to what happens after day one. Both standards put a right-of-use (ROU) asset and a lease liability on the lessee's balance sheet for nearly every lease. Then they split: ASC 842 keeps two lessee models, and an operating lease shows a single straight-line cost. IFRS 16 has one model: every lease it recognizes shows depreciation plus interest.

That gap matters to a US private company with a foreign parent, a foreign subsidiary, a lender or an acquirer reporting under International Financial Reporting Standards (IFRS). The same lease gives them different expense timing and a different cash flow statement. It also gives a different EBITDA, meaning earnings before interest, taxes, depreciation and amortization. This page sets out each difference with the paragraph on both sides, then expenses one lease both ways.

The start dates differ too. IFRS 16.C1 applies the standard to annual reporting periods beginning on or after 1 January 2019. For private companies, Accounting Standards Update (ASU) 2020-05 deferred Accounting Standards Codification (ASC) 842 to fiscal years beginning after December 15, 2021. A calendar-year US subsidiary may have adopted three years after its IFRS parent.

Where do IFRS 16 and ASC 842 agree?

Under ASC 842-20-30-1, a lessee measures the lease liability at the present value of the lease payments not yet paid. IFRS 16.26 says the same, and IFRS 16.22 puts a right-of-use asset beside it at the commencement date.

ASC 842-20-30-3 and IFRS 16.26 both use the rate implicit in the lease when it is readily determinable. When it is not, both turn to the lessee's incremental borrowing rate. The US side on its own is covered in ASC 842 lease accounting made simple.

Which paragraph governs each difference?

Each row names the rule on the US side and the rule on the IFRS side. IFRS 16 is the standard issued by the International Accounting Standards Board (IASB).

Why does the same lease produce a different expense pattern?

ASC 842 asks a question that IFRS 16 never asks of a lessee: which kind of lease is this? Under ASC 842-10-25-2, a lease is a finance lease when it meets any of five criteria at commencement. They test ownership transfer, a purchase option, the lease term, the present value of the payments and a specialized asset. When none is met, ASC 842-10-25-3 makes it an operating lease.

The label drives the income statement. For an operating lease, ASC 842-20-25-6 requires a single lease cost. It is calculated so the remaining cost of the lease is allocated over the remaining term on a straight-line basis. The paragraph allows another systematic and rational basis where that better represents the pattern of benefit.

For a finance lease, ASC 842-20-25-5 requires amortization of the right-of-use asset and interest on the lease liability. The tests that sort a lease into one model or the other are on the lease classification page.

IFRS 16 has only the second pattern. IFRS 16.31 depreciates the right-of-use asset under IAS 16. IFRS 16.36 through 16.38 add interest at a constant periodic rate on the remaining liability. KPMG's comparison of the two standards describes IFRS 16 as effectively treating every on-balance-sheet lease as a finance lease.

On the books, an operating office lease costs the same every year, on a straight-line pattern, under ASC 842-20-25-6. Under IFRS 16 it costs more early and less late, because interest falls as the liability is paid down.

Worked example: one five-year lease expensed under both standards

The figures are invented so every number can be recomputed. Amounts are rounded to the cent at each step. The lease is an operating lease under ASC 842.

The present values of the five payments are $94,339.62, $88,999.64, $83,961.93, $79,209.37 and $74,725.82. They sum to $421,236.38, computed from unrounded factors. That is the opening lease liability and right-of-use asset under both standards.

The liability also runs the same under both. Interest is the opening balance times 6.0%, so Year 1 interest is $421,236.38 x 6.0% = $25,274.18. The year-end balances are $346,510.56, $267,301.19, $183,339.26, $94,339.62 and zero. Under IFRS 16 the right-of-use asset is depreciated straight-line: $421,236.38 / 5 = $84,247.28, with two cents of rounding taken in Year 5.

Both columns reach $500,000.00, the cash paid. IFRS 16 simply books $14,844.72 of it earlier. The balance sheet shows the same gap. Under ASC 842-20-35-3, the operating lease asset is the liability adjusted for prepaid or accrued rent, incentives, initial direct costs and impairment.

This lease has none of those, so the ASC 842 asset is $346,510.56 at the end of Year 1. The IFRS 16 asset at that date is $421,236.38 - $84,247.28 = $336,989.10. The $9,521.46 difference is the extra Year 1 expense. A parent consolidating under IFRS carries a lower asset than the US subsidiary's own books show, against the same liability.

What happens to EBITDA and the cash flow statement?

Neither standard defines EBITDA, but it is where a lender or an acquirer sees the difference first. ASC 842-20-45-4 puts operating lease expense in income from continuing operations. The $100,000 is an operating cost, above EBITDA. IFRS 16.49 presents interest on the lease liability apart from depreciation, as a component of finance costs, so both IFRS 16 charges sit below EBITDA.

The IASB's Effects Analysis for IFRS 16 contrasts the Financial Accounting Standards Board (FASB) model. It says "the FASB model is designed so that expenses related to those leases are reported typically on a straight-line basis and are included within operating costs."

In the example, Year 1 EBITDA is $100,000.00 higher under IFRS 16, while Year 1 pretax profit is $9,521.46 lower. A covenant written on EBITDA reads differently under each standard.

The cash flow statement moves too. ASC 842-20-45-5 classifies payments arising from operating leases within operating activities. IFRS 16.50 classifies the principal portion within financing activities, and the interest portion under IAS 7's rules for interest paid. In Year 1 that is $100,000.00 - $25,274.18 = $74,725.82 of principal in financing under IFRS 16.

Which leases can stay off the balance sheet under each standard?

Both standards let a lessee elect, by class of underlying asset, to keep short-term leases off the balance sheet (ASC 842-20-25-2; IFRS 16.5(a) and 16.8). Both definitions use 12 months: the ASC 842 Master Glossary on one side, IFRS 16's Appendix A on the other. The ASC 842 definition excludes a lease only when the lessee is reasonably certain to exercise a purchase option.

IFRS 16's Appendix A is stricter: "A lease that contains a purchase option is not a short-term lease."

The low-value election exists only in IFRS 16. IFRS 16.5(b) allows it, IFRS 16.8 applies it lease by lease, and IFRS 16.B3 through B8 judge value when the asset is new, on an absolute basis. IFRS 16.B8 gives tablets, personal computers, small office furniture and telephones as examples. IFRS 16.B6 rules out cars.

The standard sets no dollar figure, but paragraph BC100 of the IASB's Basis for Conclusions gives the board's thinking. The board "had in mind leases of underlying assets with a value, when new, in the order of magnitude of US$5,000 or less." ASC 842 has no such exemption. Deloitte's Roadmap notes that the FASB believes an entity may instead adopt a reasonable capitalization policy based on materiality.

Does a CPI rent increase remeasure the lease liability?

Under IFRS 16, yes; under ASC 842, not by itself. ASC 842-10-35-4 lists the events that remeasure lease payments. It adds that a change in a reference index or rate on which variable lease payments are based is not the resolution of a contingency. ASC 842-10-35-5 updates the index only when another remeasurement event occurs.

On the US books, the liability stays on the index at commencement, and each increase runs through variable lease cost in the period the obligation is incurred (ASC 842-20-25-6(b)). The mechanics are in variable lease payments under ASC 842.

IFRS 16.42(b) goes the other way for a change in an index or rate. The lessee remeasures the lease liability "only when there is a change in the cash flows (ie when the adjustment to the lease payments takes effect)." IFRS 16.43 keeps the discount rate unchanged unless the change comes from floating interest rates, and IFRS 16.39 books the adjustment against the right-of-use asset.

A lease with annual Consumer Price Index (CPI) increases is therefore remeasured every year under IFRS 16.

Can a private company use a risk-free discount rate under IFRS 16?

No. The election is a US one. ASC 842-20-30-3 permits a lessee that is not a public business entity to use a risk-free discount rate instead of its incremental borrowing rate. The rate is determined using a period comparable with the lease term, and the accounting policy election is made by class of underlying asset.

IFRS 16.26 offers the implicit rate or the incremental borrowing rate, and nothing else. KPMG's comparison makes the same point: IFRS 16 has no private-company exception.

On the books, a lessee that makes the US election discounts at a rate below its incremental borrowing rate. Its lease liability and right-of-use asset come out larger than the IFRS figures for the same lease. Deloitte's Roadmap, section 7.2.3, adds that the higher present value can even change the classification. An IFRS figure for the same lease needs an incremental borrowing rate, built the way calculating the incremental borrowing rate for ASC 842 describes.

How do subleases and sale and leasebacks differ?

A sublessor classifies the sublease against a different asset. ASC 842-10-25-6 classifies it by reference to the underlying asset, such as the building, rather than the right-of-use asset. IFRS 16.B58 classifies it by reference to the right-of-use asset arising from the head lease.

PwC's IFRS and US GAAP: similarities and differences guide uses a five-year office lease subleased for its whole term. ASC 842 compares five years with the building's remaining life; IFRS 16 compares it with the five-year right-of-use asset.

For a sale and leaseback, both standards test the sale under their revenue standard: ASC 842-40-25-1 points to Topic 606 and IFRS 16.99 to IFRS 15. Under ASC 842-40-25-2 there is no sale if the leaseback would be classified as a finance lease by the seller-lessee or a sales-type lease by the buyer-lessor.

When there is a sale, PwC's guide measures the US gain as the difference between the adjusted sale proceeds and the book value of the asset transferred. That is the full gain on the asset. IFRS 16.100(a) recognizes only the gain that relates to the rights transferred to the buyer-lessor.

None of these differences changes the lease data itself. The US rules are set out in the ASC 842 lease accounting guide and in what changed under FASB ASC 842 and who it affects.

Frequently asked questions

Is IFRS 16 the same as ASC 842?

No. Both put a right-of-use asset and a lease liability on the lessee's balance sheet. ASC 842 keeps finance and operating leases for lessees, and an operating lease has a single straight-line cost under ASC 842-20-25-6. IFRS 16 has one lessee model, so every recognized lease produces depreciation plus interest.

Does ASC 842 have a low-value asset exemption?

No. The low-value election is in IFRS 16.5(b) only, applied lease by lease under IFRS 16.8. Paragraph BC100 of the IASB's Basis for Conclusions says the board had in mind assets worth in the order of magnitude of US$5,000 or less when new. ASC 842 offers only the short-term lease election in ASC 842-20-25-2.

Does a CPI rent increase remeasure the lease liability under ASC 842?

Not by itself. ASC 842-10-35-4 says a change in a reference index or rate is not the resolution of a contingency. ASC 842-10-35-5 updates the index only when another remeasurement event occurs. Under IFRS 16.42(b), the lessee remeasures the lease liability when the adjustment to the lease payments takes effect.

Sources and further reading

• ASC 842-10-25-2, 25-3 and 25-6 (classification); ASC 842-10-35-4 and 35-5 (remeasurement of lease payments).
• ASC 842-20-25-2, 25-5 and 25-6 (recognition); ASC 842-20-30-1 and 30-3 (initial measurement); ASC 842-20-35-3 and 35-4 (subsequent measurement); ASC 842-20-45-4 and 45-5 (presentation).
• ASC 842-40-25-1 to 25-4 (sale and leaseback).
• IFRS Foundation, IFRS 16 Leases: paragraphs 5 to 8, 22, 26, 31, 36 to 43, 49, 50, 99 to 103, B3 to B8, B58, C1 and Appendix A. This is the 2021 issued text. A 2022 amendment added paragraph 102A on sale and leaseback, effective January 1, 2024, which this page does not cover.
• Deloitte, Roadmap: Leases, section 7.2.3, Use of a Risk-Free Rate by Lessees That Are Not PBEs: the effect of the election on the liability and on classification.
• IFRS 16 Basis for Conclusions, hosted by the AASB, paragraph BC100: the US$5,000 quotation.
• IASB, IFRS 16 Effects Analysis (January 2016), page 4: the quotation on the FASB model and the effect on EBITDA.
• PwC, IFRS and US GAAP: similarities and differences, 14.7 Sublease transactions: the five-year office example. Sections 14.6 Lease re-assessments and modifications and 14.8 Sale and leaseback transactions cover the index and gain differences.
• KPMG, Lease accounting: IFRS Accounting Standards vs US GAAP: the single-model and discount rate observations.
• Deloitte, Roadmap: Leases, Appendix B, Differences between US GAAP and IFRS Accounting Standards: the materiality-based capitalization policy. The ASC 842 text was read in the Roadmap's chapters 6, 7, 8, 10, 12 and 14.
• Deloitte, Heads Up: FASB defers effective dates of revenue and leasing standards: the ASU 2020-05 private-company date.

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