Leases: IAS 17
The scope of IFRS lease guidance includes the right to use other types of assets in addition to property, plant, and equipment (e.g., certain intangible assets). Certain intangible assets are within the scope of IAS 17 if they establish rights for the exclusive use of the intangible asset. For example, brands and trademarks often are licensed exclusively and therefore are included in the scope of IAS 17.
Under IFRS, lease classification (e.g., operating or finance – which is the IFRS term for capital lease) depends on similar criteria as U.S. GAAP, but without the bright-line guidance. For example, IAS 17 states that a lease would normally be a finance lease if the lease term is for the “major part” of the economic life (not a strict 75 percent), or the present value of the minimum lease payments at lease inception is for “substantially all” of the fair value (not 90 percent). The basic IFRS principle is: if the lease does not transfer substantially all risks and rewards incidental to ownership to the lessee, then the lease is classified as an operating lease.
Leases of Land and Buildings
U.S. GAAP generally requires the lease of land and building elements to be accounted for as a single unit in all but limited circumstances. IAS 17 requires the lease of land and building elements to be accounted for separately for a lease classification unless the land element is not material. The present value of the minimum lease payments, including any lump-sum upfront payments, are allocated between the land and building elements based on the relative fair values of the lessee’s leasehold interest in the land and the building. This can significantly impact Consumer Product companies that lease both the land and the building. Consumer Product companies will need to reassess their lease classifications and may need to break out the land and the building into separate leases.
Similar to U.S. GAAP, lease expense should be recognized on a straight-line basis over the lease term, unless another systematic basis is more representative of the pattern of benefit. Lease incentives (such as free rent periods) are recognized as a reduction of expense over the lease term.
Under U.S. GAAP, separate requirements exist for sale and leaseback transactions involving real estate. Under IFRS, there is no difference in accounting between sale and leaseback transactions involving real estate and non-real estate assets. Under IFRS, the timing of recognition of a gain or loss on a sale and leaseback transaction differs depending on the classification of the leaseback.
Comparison of Impairment Approaches
Deferred and amortized over lease term
Record immediately if sales price is established at fair value. Otherwise, defer and amortize over lease term.
Deferred and amortized over lease term with limited exceptions (seller retains less than substantially all of the use of the leased asset)
Summary of Impact on Leases
Key Accounting Differences
Determining lease classification
Break out land and building into separate lease
If known, use implicit rate for discount rate even if higher than incremental borrowing rate
Recognize gain on sale-leaseback for operating lease immediately
No specific guidance for specialized leases (leveraged-leases, etc.)
Potential Implications Process/Systems
Potentially more capital leases
Income recognition from
Lease classification system changes
Increased diligence to determine separate value of land and building, identify implicit rate, and apply guidance
Impact from change in lease classification and sale-leaseback gains