Comparison between U.S. GAAP and International ... - Grant Thornton

Comparison between U.S. GAAP and International Financial Reporting Standards 58
IFRS
inception of the lease is the earlier of the lease
agreement date and the date the parties commit to the
principal provisions of the lease (IAS 17.4).
A finance lease is one that transfers substantially all the
risks and rewards of ownership of an asset to the
lessee. An operating lease does not (IAS 17.8).
U.S. GAAP
must include the principal provisions and be signed by the
interested parties (ASC Master Glossary, “Lease
Inception”).
A capital lease (finance lease) is one that transfers
substantially all the benefits and risks of ownership of an
asset to the lessee, in accordance with specific criteria. All
other leases are operating leases (ASC 840-10-10-1).
Lease classification
IAS 17 lists factors normally indicating a finance lease,
including any of the following (IAS 17.10):
• Transfer of ownership by end of lease term
• Lessee has option to purchase asset at a price that
is expected to be sufficiently lower than fair value
at date option becomes exercisable such that
option exercise is reasonably certain at inception
• Lease is for major part of asset's life, even if title is
not transferred
• Leased assets are specialised such that only the
lessee can use them without major modification
• Present value of minimum lease payments at
inception amounts to at least substantially all of the
fair value of the leased asset (IAS 17.4)
IAS 17 also lists other potential indicators of a finance
lease (individually or in combination) including
(IAS 17.11):
• Lessor's losses borne by lessee if lessee has
option to cancel
• Gains or losses in fair value of residual accrue to
lessee
• Lessee has ability to continue lease for secondary
term at substantially below-market rent
In general, the criteria in ASC 840 for a capital (finance)
lease are similar to the IFRS indicators; however, there
are more detailed (bright line) requirements under U.S.
GAAP. A capital lease is one that meets one or more of
the following criteria (ASC 840-10-25-1):
• Lease transfers ownership of the property to the
lessee by the end of the lease term
• Lease contains a bargain purchase option
• Lease term is equal to 75 percent or more of the
estimated economic life of the leased property. This
criterion does not apply if lease inception is within the
last 25 percent of the property’s economic life.
• Present value of the minimum lease payments at the
beginning of the lease term equals or exceeds 90
percent of the excess of the fair value of the leased
property to the lessor at the inception of the lease
over any related investment tax credit retained by the
lessor and expected to be realized by the lessor. This
criterion does not apply if lease inception is within the
last 25 percent of the property’s economic life.
U.S. GAAP does not have additional indicators for capital
lease treatment in ASC 840; however, some of the
concepts are reflected in minimum lease payments or the
lease term.
Unlike IFRS, ASC 840 requires that the lessor meet the
following additional criteria to classify a lease as a capital
lease (direct financing or sales-type lease)
(ASC 840-10-25-42):
• Collectibility of the minimum lease payments is
reasonably predictable
• No important uncertainties surround the amount of
unreimbursable costs yet to be incurred by the lessor
under the lease
Accounting treatment
Operating leases (lessee/lessor):
• Lease rentals shall be expensed and lease
revenue shall be recognised on a straight-line basis
Operating leases (lessee/lessor):
• Similar to IFRS (ASC 840-20-25-1)
• Similar to IFRS (ASC 840-20-25-6 and 25-7)
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