No, IFRS 15 Revenue from Contracts with Customers does not apply to lease contracts, as they are specifically scoped out and covered under IFRS 16 Leases. However, IFRS 15 is used to allocate consideration in a contract that contains both lease and non-lease components, or to account for service components.
IFRS 15 does not apply to wholly unperformed contracts where all parties have the enforceable right to end the contract without penalty. These contracts do not affect an entity's financial position until either party performs under the contract.
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases.
AS-19 deals with the accounting policies applicable for all types of leases except certain listed below. A lease is a transaction whereby an agreement is entered into by the lessor with the lessee for the right to use an asset by the lessee in return for a payment or series of payments for an agreed period of time.
ASC 842 is the US GAAP standard for accounting for leases governed by the Financial Accounting Standards Board (FASB), while IFRS 16 is the corresponding International Financial Reporting Standard(s) governed by the International Accounting Standards Board (IASB).
ASC 606 vs. IFRS 15. ASC 606 applies to all entities that enter into contracts with customers, while IFRS 15 applies to all entities that have customer contracts, except for contracts in the scope of IFRS 17 insurance contracts.
Lease classification
Application of ASC 842 results in lessees classifying their leases (or separate lease components) as either financing or operating leases and lessors classifying their leases (or separate lease components) as sales-type, direct-financing or operating leases.
With limited exceptions, all leases are “on balance sheet” and result in the recognition of an asset and a liability. The scope of the standards are consistent in that they provide guidance on accounting for contracts that meet the definition of a lease, however, that definition differs between each standard.
The standard replaced ASC 840 and, among other changes, requires organizations to record the majority of their leases on the balance sheet. It was instituted by FASB to help enhance transparency into lease liabilities for financial investors and to reduce off-balance sheet financing.
The 90% rule in leasing is an accounting guideline for classifying leases, stating that if the present value (PV) of a lessee's minimum lease payments equals or exceeds 90% of the leased asset's fair market value (FMV), the lease should be treated as a finance lease (or capital lease) rather than an operating lease, reflecting essentially a purchase for accounting purposes. This rule helps determine if the lease transfers substantially all the risks and rewards of ownership, requiring balance sheet recognition of the asset and liability.
Under the lessee accounting model under IFRS 16, there is no longer a classification distinction between operating and finance leases. Instead, a single model approach now exists whereby all lessee leases post-adoption are reported as finance leases.
There are two types of lease classifications for a lessee: finance and operating. There are three types of leases for a lessor: direct financing, sales-type, 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.
Lease contracts and insurance contracts are exceptions to the application of IFRS 15.
IFRS 15 introduces a unified Five-Step Model for revenue recognition, replacing a myriad of previous guidelines and interpretations. It emphasizes performance obligations, transaction price allocation, and enhanced disclosure requirements, offering a more consistent and detailed approach to revenue recognition.
IFRS 16 replaces IAS 17, IFRIC 4, SIC-15 and SIC-27. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. In May 2020 the Board issued Covid-19-Related Rent Concessions, which amended IFRS 16.
With ASC 842, only property and equipment are within scope of the new guidance whereas all intangible assets are exempt. Under IFRS 16, lessees may apply the guidance to leases of intangible leased assets as well. Both ASC 842 and IFRS 16 apply only to leases with a term longer than 12 months.
In May 2014 the Board issued IFRS 15 Revenue from Contracts with Customers, together with the introduction of Topic 606 into the Financial Accounting Standards Board's Accounting Standards Codification®. IFRS 15 replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC‑31.
A lessee must capitalize a leased asset if the lease contract entered into satisfies at least one of the four criteria published by the Financial Accounting Standards Board (FASB). An asset should be capitalized if: The lessee automatically gains ownership of the asset at the end of the lease.
There are optional recognition exemptions when the lease term is 12 months or less or when the underlying asset has a low value when new.
The lease term is greater than or equal to 75% of the asset's estimated useful life. The present value of the lease payments is greater than or equal to 90% of the fair value of the asset. Ownership of the asset may be transferred to the lessee at the end of the lease.
If any one of these five criteria are met, at its inception, the lease should be considered a finance lease:
ASC 842 applies to all leases unless the lessee makes the policy election to not apply the standard to leases of 12 months or less. ASC 842 is for leases of all types, buildings, equipment, vehicles, land, and more.
The new lease accounting standards aim to make financial statements clearer and more uniform. This shift is a deliberate move towards greater transparency in financial reporting. Lease administrators, CFOs, and accountants must adapt to these changes.