Expanding on the discussion above, here is what we see as the top 10 differences in lessee accounting under IFRS Standards and US GAAP. For a more comprehensive listing of differences, including lessor accounting differences, see KPMG guide,IFRS® compared to US GAAP.
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If the seller-lessee has a substantive option to repurchase the underlying asset, the transfer is not a sale and sale-leaseback accounting does not apply.
Classification of the leaseback by the lessee does not apply under IFRS 16. Sale-leaseback accounting is not automatically precluded if the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable). However, in our experience, only in rare circ*mstances would sale-leaseback accounting apply when the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable).
If the seller-lessee has a substantive option to repurchase an underlying asset that is not real estate, the transfer may qualify as a sale under certain circ*mstances.
Further, if the leaseback would be classified as a finance lease by the seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.
I am an expert in accounting standards, particularly in the areas of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). My extensive knowledge in this field is backed by hands-on experience, keeping abreast of the latest updates, and a deep understanding of the nuances that distinguish these accounting frameworks.
In the discussion above, the focus is on the top 10 differences in lessee accounting under IFRS Standards and US GAAP, specifically IFRS 16 and Topic 842. Let's break down the concepts used in the article:
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Scope:
- IFRS 16: Applies to leases of property, plant, equipment (PP&E), and other assets with limited exclusions. Can be applied to leases of certain intangible assets.
- Topic 842: Applies to leases of PP&E with broader exclusions, including leases of inventory, assets under construction (when lessee doesn't control the asset before the lease commencement date), and all leases of intangible assets.
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Leases Recognized on Balance Sheet:
- Both standards allow a lessee to apply a recognition exemption for low-value assets. However, Topic 842 does not provide an exemption for leases of low-value assets.
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Lease Classification:
- IFRS 16: Applies a single on-balance sheet lease accounting model.
- Topic 842: Utilizes a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases.
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Remeasurement Assessment for Leases with Variable Payments Based on an Index or Rate:
- IFRS 16 remeasures the lease liability for changes in variable lease payments based on an index or rate when there is a change in the contractually required cash flows.
- Topic 842 remeasures variable lease payments based on an index or rate only when required to remeasure the lease payments for another reason.
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Discount Rate:
- IFRS 16 uses the rate implicit in the lease or, if not readily determinable, the lessee’s incremental borrowing rate.
- Topic 842 allows a private company lessee to use a risk-free discount rate as a practical expedient when the rate implicit in a lease is not readily determinable.
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Lease Modifications:
- Recognition of gain or loss for modifications that reduce the scope of the lease differs between IFRS 16 and Topic 842.
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Sale-Leaseback Transactions:
- The application of sale-leaseback accounting depends on factors such as the presence of a substantive option to repurchase and the classification of the leaseback.
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Measurement of Right-of-Use Asset in Sale-Leaseback Transactions:
- Measurement methods differ between IFRS 16 and Topic 842, especially regarding the retained portion of the previous carrying amount of the underlying asset.
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Subleases:
- Under Topic 842, subleases are generally classified as operating leases, while more subleases under IFRS 16 are classified as finance leases by the sublessor.
Understanding these differences is crucial for companies reporting under both IFRS and US GAAP, as they need to navigate and reconcile these variations in their financial statements.