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Regulation

In: Business and Management

Submitted By lscerxh
Words 293
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Now I will discuss the comparison of accounting for operating leases under GAAP and IFRS. The accounting treatment is almost the same. Basically, an operating lease is a rental arrangement under which the lessor collects rents from the lessee for the use of the leased assets. For the lessee, operating leases only hit the income statement as the lessee recognizes rent expense over the lease term, while the lessor records rental income and depreciate the leased assets over the useful life. For this reason, companies prefer operating leases to make financial statements look much better but they must disclosure such leases in the notes to the financial statements.
Sale-leaseback arrangement is another significant part of leases accounting. In such a transaction, the seller of a property sells the assets and then leases it back. The recognition of profit or loss on the sale is governed by different rules under GAAP and IFRS.
Under GAAP, it captures the substance of the leaseback transactions In addition to considering the classification; the treatment of profits is also determined by the portion of rights retained to the leaseback property. If the seller retains “substantially all” rights to the assets, the seller must defer all gains. If the seller retains less than 10% of rights, the seller can recognize gains or losses at the time of the transaction. If the rights retained are in between, the seller should recognize some gains and defer some gains.
Under IFRS, rules are straightforward. The profit on a sale-leaseback transaction depends on the classification of finance leases and operating leases. For finance leases, profits from the sale are deferred. Otherwise, the general rule is to recognize profits or losses immediately except when the sales price is above fair

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