Leasing is a prevalent practice for entities in a wide variety of industries. Stakeholders have expressed concerns about the existing lease accounting guidance in both Topic 840, Leases, and International Accounting Standard (IAS) 17, Leases, because it does not require lessees to recognize assets and liabilities from operating leases on the balance sheet. Stakeholders have criticized that this model fails to meet the requirements of financial statement users because it does not faithfully represent leasing transactions.
As a result of these concerns, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a joint project in 2006 intended to comprehensively restructure the existing lease accounting guidance for both lessees and lessors.
In January 2016, the IASB issued its final standard, IFRS 16, Leases, which supersedes the guidance in IAS 17. In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). This ASU supersedes the guidance in Topic 840 and introduces a new Topic 842, Leases.
Because the FASB and the IASB worked jointly on the leases project, many of the requirements in the two standards align, such as requiring lease assets and lease liabilities to be recorded on the balance sheet and requiring key disclosures about these arrangements. There are, however, significant differences.
One of the most significant differences between the two standards relates to the classification of a lease. Under US GAAP, a lessee must determine whether a lease is an operating or a finance lease. Both types of leases require a lessee to record a right-of-use asset and a lease liability on the balance sheet, but the income statement presentation is different between the two classifications.