Lease Accounting Made Clear: IFRS vs. US GAAP for Sellers Considering a Sale-leaseback

Lease accounting has never been simple, but the arrival of ASC 842 in the US and IFRS 16 internationally has made it even more challenging. Both standards bring leases onto the balance sheet, yet they take very different approaches. If you only report under one standard, the rules are relatively straightforward. But for many European and multinational companies that report under both, the differences can create extra complexity.

And for companies consider a sale-leaseback this matters – because you’re moving from being an owner (with property recorded as PP&E) to a lessee (with right-of-use assets and lease liabilities).

Here’s a look at how IFRS and US GAAP diverge, and what that means in practice.

One set of rules vs. two

IFRS 16 uses one set of rules for all leases – they’re recorded on the balance sheet as a right-of-use asset and a lease liability, and expenses ares split between interest and amortization.

Under US GAAP (ASC 842), all leases also go on the balance sheet the same way, but the difference shows up on the income statement. Finance leases follow the IFRS approach (interest and amortization), while operating leases are recorded as a single, straight-line rent expense. Importantly, classification under US GAAP depends on the terms of the lease contract (e.g. does ownership transfer, does the lessee have a bargain purchase option, does the term cover most of the asset’s usable life, and does the present value of the lease payments equal or exceed substantially all of the fair value of the asset).

How changing lease payments are handled

Another key difference is how variable lease payments are treated.

Under IFRS, if lease payments go up or down because they are tied to something like inflation (i.e. CPI), the lease liability on the balance sheet (essentially what a company still owes for future lease payments) is updated to reflect that change.

Under US GAAP, however, the balance sheet stays the same and the changes flow through to the income statement as expenses as they occur.

Short-term exceptions

Both frameworks make an exception for very short-term leases (under 12 months), allowing them off the balance sheet.

Why It Matters

These differences affect how your financials look, how ratios move and how investors view your business. For companies that have to report under both standards, it’s especially important to understand the nuances.

For companies doing a sale-leaseback, the accounting may differ, but the underlying economics don’t. What changes is how the results are presented. That’s why it’s important to work with an experienced, international partner like W. P. Carey who can understand your goals and help you navigate both frameworks

Want to dive deeper? Check out our full breakdown of IFRS vs. US GAAP lease accounting.

This article is for informational purposes only and should not be considered accounting advice. Please consult your own advisor regarding your specific situation.