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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) © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
Comparison between U.S. GAAP and International Financial Reporting Standards 59 IFRS over lease term unless another systematic basis is representative of the time pattern of the user's benefits (IAS 17.33 and .50) • Incentives shall be recognised as a reduction of rent expense (lessee) or rental income (lessor) on a straight line basis over the lease term unless another systematic basis is representative of the time pattern of the user's benefits (SIC-15.3-.5) Finance leases (lessee): • At commencement of lease term, initial recognition at fair value of the leased asset or, if lower, present value of minimum lease payments (each determined at inception of lease) (IAS 17.20) • Rate implicit in lease is generally used to calculate present value. If not practicable to determine, incremental borrowing rate is used (IAS 17.20) • Capitalise assets held under finance leases – depreciate on same basis as for owned assets. If no reasonable certainty that lessee will obtain ownership, depreciate over shorter of lease term and useful life (IAS 17.27). • Minimum lease payments shall be allocated between finance costs and the reduction of the outstanding liability. Finance costs shall be allocated to each period to produce a constant rate on outstanding obligation. Contingent rents shall be expensed as incurred (IAS17.25). Finance leases (lessor): • Recognise asset held under a finance lease as a receivable in the statement of financial position in the amount of the net investment in the lease (IAS 17.36), which is the gross investment in the lease discounted at the interest rate implicit in the lease (IAS 17.4). Gross investment in the lease is the sum of the minimum lease payments and the unguaranteed residual value accruing to lessee (IAS 17.4). • Finance income shall be recognised in a manner that reflects a constant periodic rate of return on the lessors' net investment (IAS 17.39). • Manufacturer or dealer lessors shall recognise selling profit or loss in the period in accordance with the policy followed by the entity for outright sales. Costs incurred to negotiate and arrange a lease shall be recognised as an expense when selling profit is recognised (IAS 17.42). U.S. GAAP Capital leases (lessee): • Initial recognition at present value of minimum lease payments or, if lower, fair value of leased property (ASC 840-30-30-1 through 30-4) • Incremental borrowing rate generally used to calculate present value. However, if it is practicable to learn rate implicit in lease and that rate is lower than the incremental borrowing rate, the implicit rate must be used (ASC 840-10-25-31). • Capitalize assets held under capital leases. If lease contains a bargain purchase option or transfers ownership to lessee, depreciate over useful life. Otherwise, depreciate over lease term (ASC 840-30-35-1). • Minimum lease payments shall be allocated between the reduction of the outstanding liability and interest expense to produce a constant rate on outstanding obligation (i.e. the interest method is used) (ASC 840-30-35-6) Capital leases (lessor): • Recognize asset for net investment in lease (ASC 840-30-30-8 through 30-10). Sales-type lease: Net investment consists of gross investment less unearned income. Gross investment is minimum lease payments, net of executory costs, plus unguaranteed residual value accruable to the benefit of the lessor. Unearned income is the difference between the gross investment and the present value of the gross investment using the interest rate implicit in the lease. The manufacturer’s/dealer’s profit on sales-type leases is the difference between (a) the present value of the minimum lease payments and (b) the leased asset’s cost or carrying amount plus any initial direct costs less the present value of the unguaranteed residual value. Special rules exist for sales-type leases involving real estate (ASC 840-30-30-8 through 30-10). © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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