IFRS 16 vs. ASC 842: A Q&A With Deloitte’s Jeanne McGovern and Derek Bradfield

The key differences between the new IFRS standard and the FASB standard.


The FASB and the IASB issued new standards in early 2016, which fundamentally changed the rules of the road for leases. Under both standards, leases will all be going on the balance sheet. But, while standards from both of the boards were originally planned as a convergence project, they’ve diverged, creating a number of complications for accounting and finance leaders for global multi-national companies.

Jeanne McGovern and Derek Bradfield, Audit Partners at Deloitte, will share the differences between the new IFRS standard and the FASB standard during the 2017 Accounting Change for Financial Leaders. Their session, IFRS 16 vs. ASC 842: Challenges Faced by Multinationals, will cover the operating challenges with implementing both standards at the same time and the important changes that need to be made to companies’ processes, systems and controls.

FEI Daily:  What are the key difference between U.S. GAAP and IFRS? 

Derek Bradfield: The initial intent of the standard setters was to converge the two standards as much as possible. But, as is the case whenever you have two groups of people looking at something, they never totally agree on everything. As a result, there were some differences that arose out of their processes. Some of the key differences are what is in scope of the two standards.

Under the U.S. standard, the lease literature only applies to tangible plant property and equipment, whereas under IFRS or under the IASB standard, the lease standard applies to leases of any asset, whether it's tangible plant property and equipment or intangible assets, as well. And so, you'll see more leases theoretically identified under the IASB standard.Another key difference is, under IFRS, there is only one model for accounting for leases whereas under U.S. GAAP there are two different models, depending on the type of lease that you've entered into. So, under current GAAP, you have operating leases, which are generally off-balance sheet treatment of the lease obligation and the asset that you're using, and capital leases which requires that the asset and liability be recorded on the balance sheet. It's the same under IFRS. Now, under U.S. GAAP, the change will be that operating leases and capital leases will have to be on the balance sheet, but you'll maintain the idea of an operating lease versus a capital lease or finance lease. What that impacts is how expense is recognized in the financial statements. Under an operating lease, the expense will be on the straight-line basis and under a finance lease it will look more like a borrowing, with interest expense and so forth. Under the IASB model, everything will be a finance lease. There won't be any straight-line expense recognition under the IASB model. That's a pretty key difference between the two.
There's also a different model for lessees and lessors under U.S. GAAP, whereas for IFRS it's the same model for both lessees and lessors. That will be a pretty big impact or divergence for lessors that are adopting the new lease standard.


One other key exception that exists under the IASB literature that does not exist under U.S. GAAP is that there is no requirement to record all your leases on your balance sheet if they're considered small leases, or low value assets, which are $5,000 or less. You're not required to go and record all of these leases on your financial statements if they're $5,000 or less. But, U.S. GAAP doesn't make such a distinction. It does allow you to only apply the standard to things that are material and so you may get to a similar answer but it's a different exercise. There's also some guidance around what companies are required to capitalize or record as an asset on their books, that under normal asset capitalization policies that they may have that could require them to record less leases. But, there is that specific exemption that exists under IASB's definition of a lease.

FEI Daily: What are global companies with reporting requirements under both IFRS and U.S. GAAP doing to address implementing these two versions of the lease standard? 

Jeanne McGovern: It certainly is a challenge. I think there are probably four key areas that companies are focusing on. The first one is data challenges. There's a high volume of data in each of the contracts. They are not in the same currency. They're not in the same language. They're not in the same system and currently IT systems that exist for leasing don't generally capture all the data points necessary under the new standards.

I think the second piece is, as Derek mentioned, the scope is different. But, in either case, the definition of a lease today is different than it was before and it's going to require companies to analyze a broader range of contracts to identify if it does contain a lease. The expectation is there are probably going to be more agreements scoped in to the leasing standard than have previously been there before.

I think the third one is process challenges. Each of the standards requires new controls, business processes and these are going to be very different than what they've been in the past when leases were generally a disclosure-only item.

The fourth is time. Time is a huge factor too. Most companies are implementing the revenue recognition standard right now, and it's causing a lot of attention to be diverted. Revenue recognition is coming first, but leases is a big challenge and there's a lot to be done there.

FEI Daily: We know that many companies are behind on revenue recognition. Where are companies in the process of implementing the standard?

Bradfield: I would say companies are in a similar position as they were a year ago for revenue recognition. Companies are thinking about it, they know it's big, they know it's coming and they feel like they really need to get started. But, for whatever reason, are having trouble getting started, either because they're focused on revenue or because it's still a year and a half away and there's other business issues, maybe, that are diverting their attention.

One of the highlights that I am seeing is that people do recognize that it's been very painful to try to get caught up on revenue recognition and so they’re trying to get started earlier on the leases side. One of the impediments to that is there aren't a lot of good automated solutions out there right now. There's a lot being developed by different vendors. I'm not aware of any of them that are ready to go live today. Companies are a little nervous about that. I think there's a little hesitation there.

We did do a survey recently, about a month ago now. 14 percent of the companies polled said that they were ready for the new leases standard, or would be ready in time. 63 percent said they're not ready and they're really just getting started. The remainder weren’t sure where they were at. Those are similar numbers to what we see on the revenue recognition side.


FEI Daily: What are the challenges you are seeing with the implementation of the FASB’s and IFRS new leasing standard?

McGovern:  I think the issue in most cases with regard to two standards, is that the headquarters companies, U.S. companies, are implementing on a consolidated basis and most are focusing on that first. The IFRS implementation is primarily related to statutory reporting requirements, which generally have a little bit of a longer deadline before they get there. The focus that we're seeing today is initially on the U.S. GAAP component of it, with IFRS coming behind. I think that's for two reasons. One is the timing of reporting on that and two because statutory reports can be handled more on a country basis or by specific business unit, as it gets further down the road.

I think Derek's comment with regard to systems is important as well, because as systems are coming online, they need to be able to have enough data contained in there to be able to calculate and disclose the information under both standards differently.

FEI Daily: Are there specific industries or types of companies that are seeing more challenges?  

McGovern: The industries where the volume of leases is high is definitely one of the high areas and that's generally retail locations. Some other industries are power and utilities and energy companies where they have some very unique service contracts and agreements that really require some technical analysis on there to determine whether or not they qualify as a lease.

Bradfield: Companies that tend to have structured leases in place, whether it was built-to-suit, for example, a company wants to build a new corporate headquarters downtown somewhere and so they enter into an agreement with a bank to get that financed. They usually do that in the form of a lease. There are a lot of other complicated lease transactions that exist out there. The transition provisions around those are pretty complicated. It seems like all the "accounting issues", are really around transition and how to deal with these kind of special type leases when you're adopting the new standard. There are some technical accounting issues, like Jeanne mentioned, around whether you have a lease or not. Especially in the power and utility industry. But, outside of that, there's not a lot of technical issues in terms of applying lease accounting. It's really a mathematical exercise of putting all your leases on the balance sheet.

Within the leasing world there's specialized transactions that are fairly complicated economically, but they also create complicated accounting questions, and from a transition perspective, going from the old rules to the new rules, most of the accounting issues are associated with those and not the traditional leases that are going to be coming on the balance sheet. There's not a lot of complicated accounting issues around those. It's the special leases that are out there.