The new financial reporting standard will retain capital leases and operating leases. The existing classification criteria to distinguish between the two leases are mostly unchanged. However, there are no explicit bright-lines anymore because the board is switching from a rule based accounting to a principle based accounting.
Under the new standard, a lease is defined as a contract that provides lessees the right to “control” the usage the “identified asset.” “Control” means accepting the substantial monetary benefits and having the right to decide how to use the asset. To meet the requirement of an identified asset, it has to be physically distinct which is not including natural gas or biological assets.
The lessee must record the rights and obligations associated with all leases as a right-of-use (ROU) asset and a corresponding liability with the present value of future lease payments. In another word, the impact on the balance sheet for both capital and operating leases is the same at original recognition. However, the effect on the subsequent income statement and cash flow would be significant different based on the lease’s classification. For income statement purpose, lessees of capital leases should recognize amortization expense on ROU asset and interest expense on the lease liability separately, whic...
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...need to work on additional tasks to align a single model subsidiaries.
Another remarkable difference between the two standards is their respective alternatives to account for small ticket leases such as printers, tablets and office equipment or fixtures. IFRS provides comprehensive guidance to what defines a small ticket lease and does not require such leases recognized on balance sheet. On the other hand, FASB provides no exemptions for small ticket leases as FASB still maintains accounting rules that allow the exclusion based on the significant implication to the user.
There also have differences on the effective date between this two standards. Under FASB, public companies will have to adopt the new standard for the fiscal year after December 15, 2019. While all of IFRS users will need to implement IFRS 16 for annual financial report period after January 1, 2019.
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