Major challenges of the new lease accounting standards

Lease Definition

Under the new lease accounting standards, ASC 842 and IFRS 16, the way companies define leases changes. Most leases are no longer referenced in footnotes, but reported on the balance sheet. Under ASC 842, leases still need to be classified as operating or finance. In many instances, lease identification will remain unchanged from the previous standards. However, the new lease definition does change the identification of some leases.

Key Considerations

1. Does a contract contain an embedded lease? Is there an identified asset in the contract? Who controls the asset? Is the asset substitutable? Who gets the economic benefits from use of the asset?

2. How are sale leaseback and built-to-suit transactions accounted for differently? What are the requirements to determine if a sale has been completed? How is control of the asset determined?

3. Do the assets meet one of the exceptions under IFRS 16: Are they less than or equal to 12 months in term or less than or equal to $5000 in value? What about the exception under ASC 842: Less than or equal to 12 months in term?

What the Experts Think

Is it a Lease? ASC 842: Let's Analyze!

August 2019 – This article from Thomson Reuters provides several examples of when a contract counts as a lease and when it does not under ASC 842.

Lease Definition: The new on-/off-balance sheet test

In this document KPMG reviews how leases will be defined under the new IASB lease accounting standards, IFRS 16.

PwC's Analysing IFRS 16 Leases - 1. Definition of a lease

In this video, Derek Carmichael from PwC discusses how to identify leases under the new IASB leasing standard, IFRS 16.