IFRS 16 vs ASC 842: one lease, two answers

Take a plain office lease: 36 monthly payments of $8,550, paid in arrears, discounted at 6.50%. The initial lease liability is $278,965.03 under either standard, and so is the right-of-use asset when there are no incentives, prepayments or initial direct costs. Measurement on day one is the easy part. The answers diverge the moment you ask what the lease costs each year.

Same liability, different expense

IFRS 16 has a single lessee model. The asset is depreciated, usually on a straight line, and interest accrues on the liability. Because interest is charged on a balance that falls over time, the total expense is higher early and lower later. In year one of our lease that is $92,988.34 of depreciation plus $15,570.31 of interest: $108,558.65.

ASC 842 asks a classification question first. If none of the five finance-lease criteria is met, the lease is an operating lease, and the lessee recognizes a single lease cost on a straight-line basis: $102,600.00 a year. The asset amortization becomes the balancing figure that makes the single cost straight-line.

Where else they part ways

• Low-value assets. IFRS 16 allows a lease-by-lease exemption for low-value underlying assets. ASC 842 has no equivalent.
• Short-term leases. Both allow a short-term election by class of underlying asset, but the definitions treat purchase options differently.
• Index-linked payments. A CPI reset triggers remeasurement of the liability under IFRS 16. Under ASC 842 it does not, on its own; the difference is variable lease cost until another remeasurement event occurs.
• Impairment. IFRS applies IAS 36 and can permit reversals. US GAAP applies the long-lived asset guidance and does not.

Why this matters for your system

Groups that report under both frameworks often keep one schedule and adjust the other book by hand at month-end. That is where errors hide. The cleaner model is to capture contract facts once and let each reporting book hold its own judgement, schedule, journals and close. That is how Leasecount is built: facts are shared, judgements are not.

This article explains general concepts and is not accounting advice. Apply the standards to your own facts with a qualified professional.