What is the main difference between IFRS 16 and ASC 842?

IFRS 16 uses a single lessee model with all leases on balance sheet. ASC 842 keeps finance vs operating classification, with operating lease cost straight-lined in P&L. Both recognize ROU assets and liabilities, but P&L geography differs.

Do both standards require reassessment?

Yes, for term changes, options reasonably certain to be exercised, and index-based payments. IFRS 16 remeasures with revised discount rate in more cases; document the trigger and rate source.

How do leases affect covenants?

Capitalized leases raise liabilities and EBITDA adjustments vary by definition. Confirm frozen GAAP vs floating GAAP in credit agreements before transition or modification.

What disclosures do auditors expect?

Maturity analysis, weighted-average term and discount rate, ROU additions, cash paid, and judgments on options and variable payments.

IFRS 16 vs ASC 842: Lease Accounting Differences That Change Close and Covenants

Single vs Dual Model in One Table

Area	IFRS 16	ASC 842
Lessee model	Single, all on balance sheet	Finance vs operating
P&L	Depreciation + interest always	Finance: interest + amortization; Operating: straight-line lease cost
Cash flow	Principal financing, interest per IAS 7 policy	Finance principal financing; operating in operations
Short-term / low-value	Exemptions elected by class	Short-term election only, no low-value
Remeasurement	Broad, revised rate often	Similar triggers, guidance differences on reassessment

Tie to ASC 842 Guide, IFRS Explained, and Month-End Close.

What Breaks in Practice

Option assessment without minutes or business-plan support.
Discount rate without source: IBR build vs implicit rate.
Variable payments linked to index not updated.
Sale-leaseback gain mismeasured — test transfer criteria first.

Link rate and term judgments to Financial Statement Analysis and Debt Covenants.

Close Checklist for Leases

New/modified contracts screened for embedded leases
Term, options, payments, rate documented per lease
ROU rollforward tied to liability
Maturity and disclosure inputs locked
Covenant calculation updated for floating GAAP

Retain evidence per SOX 404 and Audit Procedures.

Worked Example: Same Lease, Two P&Ls

10-year office lease, $120k/year, 5% discount rate. Liability ≈ $927k, ROU asset ≈ $927k under both standards.

Year	IFRS 16 (depr $92.7k + interest)	ASC 842 operating (straight-line)
1	$92.7k + $46.4k = $139.1k	$120.0k
5	$92.7k + $30.1k = $122.8k	$120.0k
10	$92.7k + $5.7k = $98.4k	$120.0k
Total	$1,200k	$1,200k

Same cash, same total — different timing. IFRS 16 front-loads expense (interest-heavy early), depressing early-year earnings vs ASC 842 operating treatment. For covenant tests on EBITDA or interest coverage, the geography matters enormously: confirm whether the credit agreement uses frozen GAAP (pre-ASC 842 operating-lease treatment), floating GAAP (current), or explicit lease adjustments — see Debt and Ratios. A “covenant breach” caused purely by geography, not economics, still requires a waiver.

IBR Build Memo (What Auditors Accept)

When the implicit rate isn’t determinable (the usual case), document the incremental borrowing rate as a build, not a number:

Base: risk-free rate for matching term and currency (e.g., 10-yr sovereign for a 10-yr lease).
Credit spread: your spread from recent debt, lender quotes, or synthetic rating — with the source attached.
Collateral adjustment: reduction for the lessor’s secured position vs unsecured borrowing (document the haircut basis).
Currency/economic adjustment: for foreign leases, local base rate plus country risk — see FX Hedging.

Retain the build with preparer/reviewer sign per Q1 Prep. “5% — management estimate” with no build is a review note every time; the same 5% with a four-line build passes.

Sale-Leaseback and Modifications (The Restatement Zone)

Sale-leaseback: first test whether a sale occurred under transfer-of-control rules — if not, it’s financing, not a sale, and no gain is recognized. Failed sale-leasebacks booked as sales are a classic restatement. Modifications (term extension, space change, payment reset): remeasure with the current revised rate and adjust ROU — never prospectively true-up old balances. Each modification needs its own memo with trigger, revised payments, rate source, and pre/post rollforward — filed with the lease register that ties to the GL and the disclosure maturity table. Link judgments to Financial Statement Analysis and retain per SOX 404.