ASC 842 VS. IFRS 16 - A JOINT PROJECT BETWEEN INTERNATIONAL ACCOUNTING STANDARDS BOARD AND FINANCIAL ACCOUNTING STANDARDS BOARD

The primary impact of ASC 842 and IFRS 16 is that they require nearly all leases to be reported on the lessees' balance sheets as assets and liabilities. However, a key difference between IFRS 16 and ASC 842 is as follows:

Under ASC 842 (US GAAP) companies will still classify their leases as operating vs. finance, whereas under IFRS 16 all leases will now be treated as a finance lease under a single lessee accounting model.

This means that under ASC 842 there is generally no change to the income statement impact for either finance or operating leases as finance leases still impact the income statement through interest and depreciation and operating leases are amortized / accreted from the lease liability and right-to-use lease asset generally producing a straight-line lease expense. Whereas under IFRS 16 essentially all leases are now being treated as finance leases creating a divergence in income statement impact from US GAAP and ASC 842 and historical IFRS earnings as the majority of former operating lease expenses will now be reflected in interest / deprecation under the singular lessee accounting model.

Key take-away – Under IFRS 16, EBITDA will be higher than historical periods. When performing diligence on cross-border deals, understanding IFRS 16’s impact on the historical financials should be a key deal consideration.

Update for private and non-profit companies - In April 2020, FASB unanimously voted to amend the effective date of ASC 842 (Leases) for private companies and not-for-profit entities as a result of the pandemic from fiscal periods ended after December 2020 to fiscal periods ended after December 2021 and interim periods within fiscal years beginning after December 2022.