Leases:

US GAAP vs. IFRS

A. HISTORY
US GAAP:
Sep. 1964 APB 5: Reporting of Leases in Financial
Statements of Lessee
Nov. 1976 FAS 13: Accounting for Leases =>ASC 840
(34 Years) Superseded APB 5
FAS 13 has been amended, affected and
interpreted by numerous FASs, FINs and EITFs.

IFRS:
Sep. 1982 IAS 17: Accounting for Leases
Dec. 1997 IAS 17: Leases
Dec. 2003 Revised version of IAS 17 issued by the IASB
Apr. 2009 IAS 17 amended for classification of land leases
B. MAJOR DIFFERENCES
1. Conceptual:
FAS 13 is RULE based: Provides precise (Bright- Line) guidelines;
IAS 17 is more PRINCIPLE based: Requires greater professional
judgment.

FAS 13 specifies that the majority of the leased assets economic
life is equal to or greater than 75% of the assets life.
FAS 13 defines substantially all of the leased assets fair value as
90% of the fair value of the property.

IAS 17 specifically states that whether a lease is a finance lease or
an operating lease depends on the substance of the transaction
rather than the form.
IAS 17 does not provide specific percentages for determining
the majority of the leased assets economic life or substantially all
of the leased assets fair value and, therefore, requires greater
professional judgment.
B. MINOR DIFFERENCES
2. Terminology:
CAPITAL lease under FAS 13 is referred to as
FINANCE lease under IAS 17.

INTEREST Expenses under FAS 13 is referred to as
FINANCE Charges under IAS 17.

3. Operating Lease:
FAS 13: Any lease other than capital lease
IAS 17: Leases that are not finance leases
C. INDICATORS
ASC 840 [FAS 13]: Lessee (4) and Lessor (4 + 2):

Lessee & Lessor:
-The lease transfers ownership of the property to the lessee;

-The lease contains a bargain purchase option;

-The lease term is equal to 75% or more of the estimated
economic life of the leased property;

-The present value of the minimum lease payments equals or
exceeds 90% of the fair value of the leased property;

Lessor:
-Collectibility of the payments required from the lessee is
reasonably predictable;

-No important uncertainties surround the amount of
un-reimbursable costs yet to be incurred by the lessor
under the lease.
C. INDICATORS
IAS 17: Lessee & Lessor (4 + 1):
-The lease transfers ownership of the asset to the lessee by the
end of the lease term;

-The lessee has a bargain purchase option;

-The lease term is for the major part of the economic life
of the asset, even if title is not transferred ;

-The present value of the minimum lease payments amounts to
at least substantially all of the fair value of the leased asset.

Added a FIFTH Test:
-The lease assets are of a specialized nature such that only the
lessee can use them without major modifications being made.
Example: R & D Lab for IBM
C. INDICATORS
IAS 17: Other Situations:
Other situations that might also lead to classification as a
finance lease are:

-If the lessee is entitled to cancel the lease, the lessor's losses
associated with the cancellation are borne by the lessee.

-If gains or losses from fluctuations in the fair value of the
residual fall to the lessee (for example, by means of a rebate
of lease payments).

-If the lessee has the ability to continue to lease for a
secondary period at a rent that is substantially lower than
market rent.
D. MINOR DIFFERENCES
1. FAS 13 uses the lessee's incremental borrowing rate unless
the implicit rate is known and is lower than the incremental
rate;
-IAS 17 uses the implicit rate of the lease even if the implicit
rate is higher than the incremental borrowing rate.

2. Future rent disclosures under FAS 13 are by year for the first
5 years, then all remaining amounts.
-Such disclosures under IAS 17 are in three groups: the first
year, years 2 through 5 inclusive, and beyond 5 years.

3. Sale-leaseback transactions of real estate may be disallowed
by FAS 13 if there is continuing involvement between the
parties (requiring the transaction to be treated instead as a
financing).
-No such disallowance is discussed in IAS 17.
D. MINOR DIFFERENCES
4. Under IAS 17, the type of lease determines the
accounting treatment of a sale and leaseback transaction:

-Profit from a finance sale and leaseback transaction is
deferred and amortized;

-Profit from an operating sale and leaseback transaction
depends on the fair value of transaction:

-A sale at fair value requires immediate recognition;

-A sale below fair value requires immediate recognition
unless the lower value is made up for by lower future rentals;

-A sale above fair value requires the amount above fair value
to be deferred over the period the asset will be used.
E. ACCOUNTING
LESSOR Accounting:
Operating Lease: IAS 17 is similar to FAS 13.
Finance Lease: IAS 17 is similar to FAS 13.

LESSEE Accounting:
Operating Lease: IAS 17 is similar to FAS 13.
Finance Lease: IAS 17 is similar to FAS 13.