Lease accounting: IFRS® Accounting Standards vs US GAAP

From the IFRS Institute – December 5, 2025

Authors: Scott Muir, Ingo Zielhoff

Under IFRS 16¹and Topic 842², lease accounting has been applied for a few years now. However, lease transactions have not become routine. With the benefit of hindsight, now is a good time to remind ourselves of the differences between IFRS Accounting Standards and US GAAP as they relate to lessees.

A recap

IFRS 16 and Topic 842 became effective for IFRS Accounting Standards preparers and US GAAP public companies in 2019, and US private entities (including most not-for-profit entities) in 2022. Both IFRS 16 and Topic 842 require lessees to report most of their leases on-balance sheet, as assets and liabilities. While the requirements under IFRS Accounting Standards and US GAAP regarding the ‘Day One’ accounting for lessees are similar, differences remain for the 'Day Two’ accounting.

Some of these Day Two accounting differences are driven by the use of a single on-balance sheet lease accounting model under IFRS Accounting Standards as compared with a dual classification on-balance sheet lease accounting model under US GAAP (i.e. finance leases and operating leases). IFRS 16 effectively treats all on-balance sheet leases as finance leases, under which the income statement expense consists of depreciation of the right-of-use asset and interest on the lease liability. In contrast, leases that are classified as operating leases under Topic 842 generally produce straight-line total lease expense.

Another key difference between IFRS Accounting Standards and US GAAP relates to the treatment of leases whose payments depend on an index or rate – e.g. a lease with payments adjusted annually for changes in the consumer price index (CPI). Under IFRS 16, the lease liability is remeasured each year to reflect current CPI. However, under Topic 842, the lease liability is not remeasured for changes in the CPI, unless remeasurement is required for another reason (e.g. the lease term changes). Instead, any additional payments arising from increases in CPI are expensed as incurred.

Challenges for dual reporters

Even now with years of experience applying IFRS 16 and Topic 842, these and other areas of divergence between the two standards continue to present challenges for dual reporters. The different requirements under IFRS Accounting Standards and US GAAP often require them to implement different processes, controls and accounting systems.

IFRS 16 vs Topic 842: Differences and considerations for lessees

Expanding on the discussion above, here is what we see as the top 10 differences in lessee accounting under IFRS 16 and Topic 842. For a more comprehensive listing of differences, including lessor accounting differences, see KPMG guide, IFRS® compared to US GAAP.

	IFRS 16	Topic 842	Preparer considerations
Scope
1	IFRS 16 applies to leases of property, plant and equipment (PP&E), and other assets, with limited exclusions. The standard may be applied to leases of intangible assets, other than certain rights held under licensing agreements for items such as motion picture films, video recordings, copyrights, etc.	Topic 842 also applies to leases of PP&E. However, its scope exclusions are broader, with leases of inventory, leases of assets under construction (when the lessee does not control the asset before the lease commencement date) and all leases of intangible assets excluded from its scope.	Certain arrangements that are accounted for as leases under IFRS 16 may not be in the scope of Topic 842. Dual reporters therefore need to identify and track any such arrangements. Scope differences between IFRS 16 and Topic 842 can be reduced by electing not to apply IFRS 16 to certain leases of intangible assets, because leases of intangible assets are excluded from the scope of Topic 842.
Leases recognized on balance sheet
2	A lessee may elect to apply a recognition exemption for leases of ‘low-value’ assets, even if such leases are material in aggregate.	There is no exemption for leases of low-value assets.	Electing the IFRS 16 exemption for low-value assets creates a difference with the accounting under Topic 842.
3	A lessee may elect to apply a recognition exemption for leases with a lease term of 12 months or less (i.e. short-term leases). A lease that contains a purchase option is not a short-term lease.	Like IFRS 16, a lessee may elect to apply the recognition exemption to short-term leases. However, unlike IFRS 16, a lease that contains a purchase option only qualifies as a short-term lease if the lessee is not reasonably certain to exercise its option.	When electing the short-term lease exemption, dual reporters need to be mindful of any differences in the identified populations of short-term leases (e.g. due to the existence of purchase options not reasonably certain to be exercised). Those differences need to be separately tracked.
Lease classification
4	A lessee applies a single on-balance sheet lease accounting model.	There is a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases. Lease classification affects subsequent measurement of the right-of-use asset, lease expense, and income and cash flow statement presentation.	Dual reporters need to separately track Topic 842 operating leases because the accounting treatment differs for those leases under Topic 842 as compared to IFRS 16.
Remeasurement assessment for leases with variable payments based on an index or rate
5	A lessee remeasures the lease liability for changes in variable lease payments based on an index or rate when there is a change in the contractually required cash flows.	Adjustments to an index or rate do not constitute a reassessment event. A lessee remeasures variable lease payments based on an index or rate only when it is required to remeasure the lease payments for another reason (e.g. the lease term changes).	Dual reporters need to separately track the remeasurement assessment for leases that are based on an index or rate.
Discount rate
6	For a lessee, the discount rate for the lease is the rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. IFRS Accounting Standards do not include different guidance for private companies – all lessees therefore apply the discount rate guidance in IFRS 16.	When the rate implicit in a lease is not readily determinable, Topic 842 allows a private company lessee to use a risk-free discount rate as a practical expedient. The expedient can be elected by class of underlying asset.	Dual reporters that are private companies under US GAAP can ensure greater consistency between their accounting under US GAAP and IFRS Accounting Standards by not availing themselves of this Topic 842 expedient.
Lease modifications
7	When a modification reduces the scope of the lease, a gain or loss is recognized for any difference between the decrease in the lease liability and the proportionate decrease in the right-of-use asset.	A modification that reduces the term of a lease is not accounted for as a decrease in the scope of the lease. Therefore, no gain or loss is recognized.	Lease modifications that reduce the lease term are accounted for differently under IFRS 16 and Topic 842, thereby requiring dual reporters to separately track the accounting for such modified leases.
Sale-leaseback transactions
8	If the seller-lessee has a substantive option to repurchase the underlying asset, the transfer is not a sale and sale-leaseback accounting does not apply. Classification of the leaseback by the lessee does not apply under IFRS 16. Sale-leaseback accounting is not automatically precluded if the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable). However, in our experience, only in rare circumstances would sale-leaseback accounting apply when the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable).	A substantive seller-lessee option to repurchase an underlying asset that is not real estate does not preclude a sale under certain circumstances. Further, if the leaseback would be classified as a finance lease by the seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.	Dual reporters may need to separately track the accounting for sale-leaseback transactions.
9	The seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset. Only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized. The gain or loss recognized is adjusted for off-market terms.	The seller-lessee measures the right-of-use asset in the same way as the right-of-use asset in any other lease. A gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.
Subleases
10	An intermediate lessor classifies a sublease as a finance or operating lease by reference to the right-of-use asset arising from the head lease.	An intermediate lessor classifies a sublease by reference to the underlying asset.	In general, most subleases under Topic 842 are classified as operating leases, while more subleases under IFRS 16 are classified as finance leases by the sublessor.

IFRS 16 vs Topic 842: Differences and considerations for lessees

	IFRS 16	Topic 842	Preparer considerations
Scope
1	IFRS 16 applies to leases of property, plant and equipment (PP&E), and other assets, with limited exclusions. The standard may be applied to leases of intangible assets, other than certain rights held under licensing agreements for items such as motion picture films, video recordings, copyrights, etc.	Topic 842 also applies to leases of PP&E. However, its scope exclusions are broader, with leases of inventory, leases of assets under construction (when the lessee does not control the asset before the lease commencement date) and all leases of intangible assets excluded from its scope.	Certain arrangements that are accounted for as leases under IFRS 16 may not be in the scope of Topic 842. Dual reporters therefore need to identify and track any such arrangements. Scope differences between IFRS 16 and Topic 842 can be reduced by electing not to apply IFRS 16 to certain leases of intangible assets, because leases of intangible assets are excluded from the scope of Topic 842.
Leases recognized on balance sheet
2	A lessee may elect to apply a recognition exemption for leases of ‘low-value’ assets, even if such leases are material in aggregate.	There is no exemption for leases of low-value assets.	Electing the IFRS 16 exemption for low-value assets creates a difference with the accounting under Topic 842.
3	A lessee may elect to apply a recognition exemption for leases with a lease term of 12 months or less (i.e. short-term leases). A lease that contains a purchase option is not a short-term lease.	Like IFRS 16, a lessee may elect to apply the recognition exemption to short-term leases. However, unlike IFRS 16, a lease that contains a purchase option only qualifies as a short-term lease if the lessee is not reasonably certain to exercise its option.	When electing the short-term lease exemption, dual reporters need to be mindful of any differences in the identified populations of short-term leases (e.g. due to the existence of purchase options not reasonably certain to be exercised). Those differences need to be separately tracked.
Lease classification
4	A lessee applies a single on-balance sheet lease accounting model.	There is a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases. Lease classification affects subsequent measurement of the right-of-use asset, lease expense, and income and cash flow statement presentation.	Dual reporters need to separately track Topic 842 operating leases because the accounting treatment differs for those leases under Topic 842 as compared to IFRS 16.
Remeasurement assessment for leases with variable payments based on an index or rate
5	A lessee remeasures the lease liability for changes in variable lease payments based on an index or rate when there is a change in the contractually required cash flows.	Adjustments to an index or rate do not constitute a reassessment event. A lessee remeasures variable lease payments based on an index or rate only when it is required to remeasure the lease payments for another reason (e.g. the lease term changes).	Dual reporters need to separately track the remeasurement assessment for leases that are based on an index or rate.
Discount rate
6	For a lessee, the discount rate for the lease is the rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. IFRS Accounting Standards do not include different guidance for private companies – all lessees therefore apply the discount rate guidance in IFRS 16.	When the rate implicit in a lease is not readily determinable, Topic 842 allows a private company lessee to use a risk-free discount rate as a practical expedient. The expedient can be elected by class of underlying asset.	Dual reporters that are private companies under US GAAP can ensure greater consistency between their accounting under US GAAP and IFRS Accounting Standards by not availing themselves of this Topic 842 expedient.
Lease modifications
7	When a modification reduces the scope of the lease, a gain or loss is recognized for any difference between the decrease in the lease liability and the proportionate decrease in the right-of-use asset.	A modification that reduces the term of a lease is not accounted for as a decrease in the scope of the lease. Therefore, no gain or loss is recognized.	Lease modifications that reduce the lease term are accounted for differently under IFRS 16 and Topic 842, thereby requiring dual reporters to separately track the accounting for such modified leases.
Sale-leaseback transactions
8	If the seller-lessee has a substantive option to repurchase the underlying asset, the transfer is not a sale and sale-leaseback accounting does not apply. Classification of the leaseback by the lessee does not apply under IFRS 16. Sale-leaseback accounting is not automatically precluded if the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable). However, in our experience, only in rare circumstances would sale-leaseback accounting apply when the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable).	A substantive seller-lessee option to repurchase an underlying asset that is not real estate does not preclude a sale under certain circumstances. Further, if the leaseback would be classified as a finance lease by the seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.	Dual reporters may need to separately track the accounting for sale-leaseback transactions.
9	The seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset. Only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized. The gain or loss recognized is adjusted for off-market terms.	The seller-lessee measures the right-of-use asset in the same way as the right-of-use asset in any other lease. A gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.
Subleases
10	An intermediate lessor classifies a sublease as a finance or operating lease by reference to the right-of-use asset arising from the head lease.	An intermediate lessor classifies a sublease by reference to the underlying asset.	In general, most subleases under Topic 842 are classified as operating leases, while more subleases under IFRS 16 are classified as finance leases by the sublessor.

Almost all companies enter into lease contracts. Given that significant differences exist between lease accounting under IFRS 16 and Topic 842, the following companies need to be particularly cognizant of these differences and the related accounting implications: dual reporters, companies switching between IFRS Accounting Standards and US GAAP, and companies converting an acquiree’s accounting policies from IFRS Accounting Standards to US GAAP (or vice versa).

Footnotes

¹IFRS 16, Leases

²Topic 842, Leases

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Scott Muir

Partner, Dept. of Professional Practice, KPMG US

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Ingo Zielhoff

Partner, Accounting Advisory Services, KPMG US

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Scott Muir

Partner, Dept. of Professional Practice, KPMG US

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Ingo Zielhoff

Partner, Accounting Advisory Services, KPMG US

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IFRS 16 vs Topic 842: Differences and considerations for lessees

IFRS 16 vs Topic 842: Differences and considerations for lessees

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