How does lease accounting differ between IFRS 16 and US GAAP, and why does it matter?

Lease accounting underwent a massive overhaul, but IFRS and US GAAP took slightly different approaches. Here is the comparison.

IFRS 16 -- Single Model for Lessees

Under IFRS 16, virtually ALL leases are treated the same way for lessees (with minor exceptions for short-term leases under 12 months and low-value assets):

1. Recognize a right-of-use (ROU) asset and a lease liability at the present value of lease payments
2. Depreciate the ROU asset over the lease term (or useful life if shorter)
3. Recognize interest expense on the lease liability

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US GAAP (ASC 842) -- Dual Model for Lessees

US GAAP distinguishes between finance leases and operating leases:

Feature	Finance Lease	Operating Lease
Balance Sheet	ROU asset + Lease liability	ROU asset + Lease liability
Income Statement	Depreciation + Interest (separate)	Single straight-line lease expense
Cash Flow (CFO)	Interest portion only	Full lease payment
Cash Flow (CFF)	Principal portion	Nothing
Expense Pattern	Front-loaded (higher early)	Straight-line (even)

Why This Matters for Analysis

Consider Harborview Retail leasing store space for $100,000/year for 10 years (discount rate 5%):

Balance Sheet Impact (Both standards):

• Lease Liability = PV of payments = ~$772,000
• ROU Asset = ~$772,000

The company's balance sheet just got larger, affecting leverage ratios. Debt-to-equity increases.

Income Statement Difference:

• IFRS 16: Year 1 total expense = Depreciation ($77,200) + Interest ($38,600) = $115,800 (front-loaded)
• US GAAP Operating: Year 1 expense = $100,000 straight-line

Over the full lease term, total expense is identical. But the timing differs -- IFRS 16 front-loads expenses.

Cash Flow Reclassification: Under IFRS 16 and US GAAP finance leases, part of the lease payment is classified as CFF (principal) rather than CFO, making CFO appear higher than under the old operating lease treatment.

Exam Tip: The CFA exam frequently tests the impact of lease capitalization on ratios. Capitalizing a lease increases assets, liabilities, EBITDA, and CFO while decreasing the current ratio.

Dive deeper into lease accounting scenarios in our CFA Level I practice materials.