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A quick comparison. IFRS vs. US GAAP IAS 17 vs. FAS 13 as amended many times. IFRS uses 5 “indicators” that are considered as a whole. Indications that a contract is a FINANCE lease Title transfer Bargain purchase option Term of lease covers a majority of leased asset’s economic life

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a quick comparison

A quick comparison

IFRS vs. US GAAP

IAS 17 vs. FAS 13 as amended many times

ifrs uses 5 indicators that are considered as a whole
IFRS uses 5 “indicators” that are considered as a whole
  • Indications that a contract is a FINANCE lease
    • Title transfer
    • Bargain purchase option
    • Term of lease covers a majority of leased asset’s economic life
    • Present value of minimum lease payments is equivalent to nearly all of the leased asset’s fair value

Note that IFRS has no “bright line” rules

Continued on next slide

indications that a contract is a finance lease continued
Indications that a contract is a FINANCE lease (continued)

5. Leased assets are of a specialized nature and are only usable by the lessee unless substantial costs are incurred to modify (nothing comparable in US GAAP)

  • Other things to consider
    • Upon early termination of lease, lessee is responsible for lessor’s losses
    • Any gains & losses due to fluctuations in fair value of leased asset are attributed to the lessee
    • Lessee has option to renew for below market cost
what to use for i
What to use for “i”
  • To do present value computations, we need an interest rate.
  • Under US GAAP:
    • Lessors always use the interest rate implicit in the lease
    • The lessee uses the LOWER of the implicit interest rate and their own incremental borrowing rate
  • Under IFRS:
  • “The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used.