Chapter 11 Accounting for Leases Financial Policy Documents

This standard applies to all companies that report under International Financial Reporting Standards (IFRS), which are used in many countries around the world. The same entries would be made for subsequent years, adjusting for any changes in the lease liability due to interest accruals and lease payments. Learn the basics of lease accounting, how it can impact your business, the latest ASC 842 lease accounting standard, and see a real-world example.

Despite the Boards’ efforts to streamline lease accounting with the convergence  of these new standards, some major differences between the two standards emerged. For example, ASC 842 continues to distinguish between finance and operating leases, both are now required to be recorded on the balance sheet. Alternatively, IFRS 16 removes the operating lease classification and requires that all lessee leases be treated as finance leases. Operating leases traditionally obscured the balance sheet, with rent expenses and lease payments finding a home in sundry places. In contrast, finance leases were more self-evident, with the financial concept underpinning them quite apparent.

IFRS industry insights: Aviation sector — Implications of the new leasing standard

Finding a lease accounting solution that has custom reporting features is also important so you can create a report specifically for your organization’s needs. That way, you’ll be an expert when colleagues request information about leases and their financial impact on the company. Your solution’s out-of-the-box forecasting reports should be able to help determine the impact your lease portfolio has on important reporting metrics, such as earnings per share and EBITDA. Using anything other than lease accounting software to calculate the above would require quite a bit of extra effort. Existing capital leases will not require adjustment or remeasurement upon transition, but they will be referred to as finance leases. When it comes to ASC 842, IFRS 16, or GASB 87 determining the right discount rate or interest rate can be tough.

Incentives can be either the payments made by the lessor to the lessee, or the reimbursement or assumption of costs of a lessee by a lessor. Often, a lessor may offer to assume what is lease accounting the payments from a lessee’s pre-existing lease with a third party. At commencement, lease incentives are treated as a reduction of the ROU asset when they are paid or payable.

Lease Classifications: Operating Lease vs. Capital Leases

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting.

The lessee may be able to purchase the asset fully from the lessor at the end of the contract term. Finance leases are long-term leases of expensive assets, where the lessee takes on most ownership risks and rewards. Lessees record the asset on their balance sheet and are responsible for maintenance, insurance, and other costs.