Introduction
Lease accounting is an important aspect of accounting that assists companies in presenting their financial obligations. In international accounting, there are two major accounting standards applied to lease accounting: International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (US-GAAP). Under IFRS, lease accounting is addressed in IFRS 16 - "Leases", while US-GAAP addresses lease accounting in ASC 842 - "Leases". In this article, we will compare lease accounting under IFRS 16 and ASC 842 to provide insight into the differences and similarities between the two standards. We have addressed lease accounting under German commercial law (HGB) in another blog article.
Key differences and similarities between IFRS 16 and ASC 842
Lease accounting background:
Before we dive into the details of lease accounting under IFRS 16 and ASC 842, it is important to understand the background and motivation for the development of these standards. Both IFRS and US-GAAP aim to improve the transparency and comparability of financial information and provide users of financial statements with an informed basis for decision-making.
Fundamental differences:
The fundamental distinction between IFRS 16 and ASC 842 with respect to lease accounting is the categorization of leases. While US-GAAP distinguishes between capital leases and operating leases, IFRS 16 has a single approach to lease accounting.
Accounting for the leased asset:
Under IFRS 16, the leased asset is recognized as a right-of-use asset and the associated liability is recognized on the lessee's balance sheet. Under ASC 842, on the other hand, in the case of a capital lease, the leased asset is recognized as an asset and the liability is recognized. Under ASC 842, in the case of an operating lease, the leased asset is not recognized on the balance sheet.
Accrual of lease term:
The accrual of lease term is done in different ways under IFRS 16 and ASC 842. While ASC 842 considers various criteria such as lease term, purchase option, and beneficial ownership, the accrual under IFRS 16 is based on the concept of control and beneficial ownership during the lease term.
Disclosure requirements:
Both standards have comprehensive disclosure requirements related to lease obligations. Entities are required to provide detailed information about future lease payments, lease terms, and significant terms of leases in order to provide users of the financial statements with a comprehensive picture.
Conclusion
Lease accounting under IFRS 16 and ASC 842 shows both differences and similarities between the two international accounting standards. While IFRS 16 takes a uniform approach and recognizes the leased asset as a right-of-use asset, ASC 842 distinguishes between capital and operating leases. It is important to consider the respective standards and to account for and disclose leases accordingly to ensure transparency and comparability of financial information. IDEA Beratungs- und Forschungsgesellschaft mbH offers customized training solutions for companies in this regard. If you have any questions or need assistance, please feel free to contact us. Our experts will be happy to help you. Please also visit our homepage at www.idea-bf.de.
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