Converting a US GAAP operating lease to IFRS requires which of the following changes? (IS and BS effects)

Converting a US GAAP operating lease to IFRS requires which of the following changes? (IS and BS effects)

• A. IS: Remove rent from operating costs and allocate across depreciation and interest; BS: Move all lease liability to debt
• B. IS: Record as depreciation; BS: Keep lease liability off the balance sheet
• C. IS: Ignore the lease; BS: Record as equity
• D. IS: Increase rent expense; BS: Ignore liability

Answer: (A)

Under IFRS 16, leases are recognized on the balance sheet by the lessee, so you bring in a right-of-use asset and a lease liability for most leases. On the income statement, the cost is no longer a single operating lease expense; it is split into depreciation of the right-of-use asset and interest on the lease liability. This reflects the fact that you now own the right to use the asset for the lease term and borrow against the payments you owe. So the correct treatment is to remove the rent from operating costs and allocate the cost across depreciation and interest on the income statement, and to recognize the lease liability on the balance sheet (often described as debt-like) along with the corresponding right-of-use asset. The other options misstate either the income statement treatment, the balance sheet presentation, or both (for example, treating the liability as off the balance sheet or ignoring the liability).

Under IFRS 16, leases are recognized on the balance sheet by the lessee, so you bring in a right-of-use asset and a lease liability for most leases. On the income statement, the cost is no longer a single operating lease expense; it is split into depreciation of the right-of-use asset and interest on the lease liability. This reflects the fact that you now own the right to use the asset for the lease term and borrow against the payments you owe.

So the correct treatment is to remove the rent from operating costs and allocate the cost across depreciation and interest on the income statement, and to recognize the lease liability on the balance sheet (often described as debt-like) along with the corresponding right-of-use asset. The other options misstate either the income statement treatment, the balance sheet presentation, or both (for example, treating the liability as off the balance sheet or ignoring the liability).