Us Gaap vs Ifrs

Background U.S. GAAP for Leases

A lease is a contract requiring the lessee to pay the lessor for use of an asset for a specified period of time. The accounting profession recognizes leases as either an operating lease or a capital lease. Use of an operating lease results in no assets or liabilities being recorded on the financial statements, all costs incurred are expensed. The use of a capital lease requires an asset and a liability to be recorded on the financial statements. Because of the various scenarios of how these contracts could affect the balance sheets of the lessee and lessor, the Financial Accounting Standards Board (FASB) provides criteria for when an asset qualifies to be capitalized. Under these standards, only one criterion need be met in order for a lease to be recorded as a capital lease.

Under U.S. GAAP, the standard pertaining to lease accounting is the Statement of Financial Accounting Standards No. 13 (FAS 13). Under the FASB’s new Accounting Standards Codification, it is now known as topic 840. Under the standard the basic criteria for capitalization of a lease are as follows:

* The lease conveys ownership to the lessee at the end of the lease term.

* The lessee has an option to purchase the asset at a bargain price at the end of the lease term.

* The term of the lease is 75% or more of the economic life of the asset.

* The present value of the rents, using the lessee’s incremental borrowing rate, is 90% or more of the fair market value of the asset.

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| If any of the above are met, the lease would be considered a capital lease and must be disclosed on the lessee’s balance sheet. If none of the criteria are met, the lease will be classified as an operating lease, with a footnote in the financial statements. The lease may or may not be classified in the same manner by both the lessee and the lessor. In the event a contract’s terms are less than one year, the contract is treated as a rental...