US GAAP (ASC 842) and IFRS 16 both require lessees to recognise most leases on the balance sheet as a right-of-use (ROU) asset and a lease liability. Beyond that shared starting point, there are important differences that affect reported profit, cash flow and day-to-day accounting.
1. One model or two
IFRS 16 uses a single lessee model. Every lease on the balance sheet is accounted for in the same way: depreciation of the ROU asset plus interest on the lease liability.
ASC 842 keeps two classifications for lessees: finance leases, accounted for much like IFRS 16, and operating leases, which are also on the balance sheet but produce a single, generally straight-line lease cost in the income statement.
2. Effect on the income statement
Under IFRS 16, total lease expense is higher in the early years, because interest is highest when the liability is largest. Depreciation and interest also sit below EBITDA, so EBITDA is typically higher than under the old rules.
Under ASC 842, an operating lease shows one lease cost within operating expenses, so the expense profile and EBITDA look very different from the same lease under IFRS 16.
3. Effect on the cash flow statement
Under IFRS 16, payments of lease principal are financing cash flows, and interest is classified according to the entity’s policy for interest paid. Under ASC 842, operating lease payments are generally operating cash flows, while for finance leases the principal portion is financing and the interest portion is operating.
4. Recognition exemptions
Both standards allow a short-term lease exemption for leases of 12 months or less without a purchase option the lessee is reasonably certain to exercise. Only IFRS 16 also offers a low-value asset exemption (for items such as laptops and small office equipment). ASC 842 has no equivalent, although entities may apply a capitalisation threshold in practice.
5. Discount rate
Both use the rate implicit in the lease if it is readily determinable, otherwise the lessee’s incremental borrowing rate. Under ASC 842, lessees that are not public business entities may elect to use a risk-free rate, by class of underlying asset.
6. Variable payments linked to an index
Under IFRS 16, the lease liability is remeasured when cash flows change because of a change in an index or rate (such as CPI). Under ASC 842, such changes are not remeasured on their own. They are recognised as variable lease cost as incurred, unless the liability is remeasured for another reason.
7. Subleases
An intermediate lessor classifies a sublease by reference to the ROU asset from the head lease under IFRS 16, but by reference to the underlying asset under ASC 842. The same sublease can therefore be classified differently under the two standards.
What this means in practice
Groups that report under both frameworks, or that convert between them for a parent or investor, need lease schedules that can produce both views. Keeping one complete lease register, with clear data on terms, payments, options and discount rates, makes both ASC 842 and IFRS 16 reporting far easier and more reliable.
This article is a general summary and not professional advice. Always refer to the full standards and your auditors for your specific facts.