This interactive model is designed to help investors understand the differences between US GAAP and IFRS accounting for lease obligations and convert US GAAP figures into the equivalent under IFRS 16.
The model converts data presented for operating leases under US GAAP into the equivalent IFRS 16 amounts. The conversion is from US GAAP to IFRS because we think the IFRS approach more consistent with the way you should analyse lease liabilities.
Input the data from companies you follow, or just experiment with different scenarios, to learn how the difference in IFRS and US GAAP accounting for leases post 2019 can affect analytical metrics.
The solution presented can only be approximate. Please read the model assumptions and explanations
The model includes simplifications that affect its accuracy. The key assumptions are that lease payments are constant each period and that leases are not denominated in a foreign currency. This results in the right-of-use lease asset being equal to the lease liability under US GAAP, as presented in the model.
The results could be significantly different in more complex situations, particularly where leases are denominated in a foreign currency or if lease payments are non-standard, such as including rent free periods. A lease liability that is greater than the right-of-use asset reported under US GAAP would be an indication that more complex factors are present.
Even if lease payments are standard and denominated in the reporting currency the use of single average figures for lease term, discount rate and growth also means that the solution presented is approximate.
In addition, transition adjustments can affect IFRS figures. The model is based on the assumption of a retrospective calculation of the transition right-of-use asset. For more information about IFRS 16 transition see our earlier article Leasing transition options.
To use the model simply enter the operating lease rental expense, average lease term, average discount rate and operating lease liability presented in the balance sheet for the US GAAP reporter. The rental expense should be an annual figure as the model is set up for annual reporting periods. If you only have quarterly results on the new standard then just multiply the quarterly rentals by 4.
The model now calculates the implied average historical growth in lease activity that is consistent with these inputs and presents the result next to the input lease liability. If this appears to be realistic and consistent with what you know about the company then it is likely that the model will give a reasonable approximation of the equivalent amounts under IFRS 16.
However, if the implied growth appears unrealistic then either the model assumptions are too simplistic for it to be reliable in that particular situation or the inputs you have used are mutually inconsistent. If the input assumptions are completely incompatible then the model will return a “no solution” message.
A further option available in the model is to input an average growth rate instead of inputting the lease liability – just delete the liability and enter the growth below instead. The growth input is then used to derive an estimated implied lease liability. This alternative use of the model may be useful to estimate a lease liability in advance of US GAAP information becoming available in 2019.
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