Real Estate Portfolio Management / Lease Administration / Lease Portfolio / Extension for Lease Accounting

Background on FASB ASC 842 and IASB IFRS 16

FASB ASC 842 and IASB IFRS 16 are recent changes to accounting standards that strive to:

To meet these goals, the updated standards require that companies:

To accomplish this, lease administrators need to classify their existing leases and new leases as operating leases or finance leases. They can do so with the ARCHIBUS Lease Classification Wizard.

FASB ASC 842

In the February 2016 Accounting Standards Update (ASU 2016-02), the United States Financial Accounting Standards Board (FASB) provided new guidance for lease accounting. These guidelines are documented in Accounting Standards Codification, Leases (Topic 842).

Compared with legacy lease accounting, ASC Topic 842 requires lessees to record assets and liabilities on the balance sheet. A main objective of ASC Topic 842 is to ensure that lessee financial statements provide comparability and transparency by recognizing assets and liabilities for the vast majority of lease arrangements. The updated guidelines change how certain elements of lease costs are treated, and these changes in turn trigger an impact review on each organization’s cash position, equity value, contract negotiations, and performance metrics.

For example, under the new guidance, a 5-year lease on a car with a right-to-buy option that will most likely be exercised should be represented financially in the same manner as if the car were owned outright; that is, as an asset. Under the previous guidance, a car such as this is often represented as an operating expense.

ARCHIBUS customers who report financial information within the United States need to comply with the new guidelines by making certain that they provide the required additional detail, financial calculations, visibility, collaboration, and data hand-offs.

Time-line for Transition to FASB ASC 842

The ARCHIBUS features for FASB ASC 842 comply with the regulations that were written into law in 2016 as part of Topic 842 and that are required beginning in 2017.

The below table shows the time-line for implementing the new accounting standard.

Type of organization Effective Date for Topic 842 Standard Date to implement the ARCHIBUS Extension for Lease Accounting
Public Companies Fiscal years beginning after December 2015, 2018
(For calendar year-end companies, this means an adoption date of January 1, 2019)
December 2018
Private Companies Fiscal years beginning after December 2016, 2019
(For calendar year-end companies, this means an adoption date of January 1, 2020)
December 2019
Public companies with retrospective comparisons

Financial statements for 2017

Organizations must apply the updates retrospectively for all comparative periods presented in the year of adoption, albeit with some practical provisions that lessen the burden of adoption.

December 2017
All organizations Update or verify electronic inventory of leases and sources of data Now

IASB IFRS 16

For leases outside of the United States, the International Accounting Standards Bureau (IASB) has developed standard IFRS 16 -- the "International Financial Reporting Standard (IFRS) No. 16, Leases" guideline.

IFRS 16 was issued in January 2016 and replaced IAS 17.

Use the IFRS 16 guidance if your company financially reports under international guidelines.

In general terms, IASB IFRS 16 specifies that all leases should be treated as finance leases unless they are short-term leases (less than one year) or they are low-value leases. IFRS roughly corresponds with FASB ASC 842; differences are outlined below.

IFRS allows either a full or a modified retrospective approach. The timeline is:

IRFS 16 Approach

Equity Adjustment

Date of Initial Application Annual Report
Retrospective January 1, 2018 January 1, 2019 December 31, 2019
Modified Retrospective January 1, 2019 January 1, 2019 December 31, 2019

Comparing FASB ASC 842 and IASB IFRS 16

The ASC 842 changes are in close alignment with IFRS 16. Most provisions are the same, including treatment of Initial Direct Costs, Tenant Improvements, options that are reasonably certain to be executed, and ROU Modifications.

However, there are still differences in the treatment required by the two standards. Multinational companies that have holdings both inside and outside the United States must account for the differences between the new FASB treatment and the IASB treatment of leases for assets in different countries.

  IASB IFRS 16 FASB ASC 842
Implementation Timeline Financial periods beginning January 1, 2019 Staggered by organization type, as outlined above
Lease Model Uses a single-model approach, with all leases being “finance leases” and recognizing a right of use asset and a lease liability. Uses a dual-model approach, dividing leases into finance leases and operating leases.
Cost Recognition Treats all leases as “finance lease” that amortizes the right-of-use asset and interest on the lease liability separately.

Finance leases amortize the right-of-use asset and interest on the lease liability separately.

CPI Escalations Included in the rent amount (base rent + CPI) that is restated each year. Index is included.

Minimum lease payment includes application of existing index or rate escalations.

Exemptions Exemptions on small assets (e.g. a $5,000 threshold is suggested) that are not tied to larger assets. No exemptions, as FASB already has rules that permit exclusion on the basis of significance to the user
Retrospective reporting Allowed under either a full or a modified retrospective approach. Allowed only under a modified approach (that differs from IASB’s) and only for the transition period.
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