New Lease Standards: IFRS vs U.S. GAAP

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New lease standards bring some clarity for financial statement users. However, they also present some challenges between IFRS and U.S. GAAP. It’s important to understand the key differences and how they may impact you moving forward. Let’s examine some of the key new lease standards.

Balance Sheets

IFRS and U.S. GAAP indicate that the responsibility of lease payments should be noted on the balance sheet. It’s the same concept, whether it’s an operating lease or a finance lease.

Income Statement Comparability

One area that becomes a bit more confusing is the income statement comparability because IFRS and U.S. GAAP take different stances on it. The key difference is that U.S. GAAP considers most lease agreements to be operating leases, which won’t cause much change in the income and cash flow statement. However, the IFRS classifies all leases as finance leases, causing the expenses to be higher at the start of the lease.

The presentation of income change will impact many other areas, such as profitability ratios as well as net income and earnings per share. Investors and finance executives alike will have to make allowances for how these differences in representation may impact their decision-making.

Cash Flow

While actual cash flows will not be changing, how they are presented will. Under IFRS, the operating and finance cash flows will increase. This is due to the lease liability repayment being classified as an operating cash outflow rather than a finance outflow. However, with GAAP cash flow will remain unchanged.

New Lease Standards Ratios

Ratios will be significantly reduced, not just because of the type of lease, but also the transition to using the new standard. It’ll be incredibly important to examine the lease footnotes to understand how the change will impact the various parts of the lease agreement as it moves through the transition period. It may take some time for financial executives and investors alike to get a solid footing in regards to the new standards.

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