EZLease was specifically designed to meet the requirements of FAS 13, the U.S. standard for lease accounting. However, the international standard, IAS 17, is very similar, and with a few minor adjustments, EZLease can provide compliance with IAS 17. Following is a description of the notable differences beween FAS 13 and IAS 17 for lessees, and the steps needed to use EZLease for IAS 17 compliance.
Canadian companies through 2010 accounted for leases following CICA 3065, which was essentially identical to FAS 13. As of 2011, all publicly accountable Canadian enterprises must comply with IFRS, including IAS 17 for leases. All leases must be reviewed at changeover to IFRS, and if IAS 17 requires different classification (finance instead of operating, for instance), the lease must be restated from inception.
This description refers to IAS 17. The new lease accounting standard, IFRS 16, substantially changes the rules. EZLease fully complies with IFRS 16 with no manual adjustments.
In the list below, all quotations are from IAS 17, with the paragraph number indicated.
1. Incremental borrowing rate under IAS 17 is preferably “the rate of interest the lessee would have to pay on a similar lease” (¶3); only if that is not determinable is one to use the lessee’s interest rate to borrow funds over a similar period of time (the standard for FAS 13).
2. Contingent rent under IAS 17 explicitly includes rent changes based on “price indices [and] market rates of interest” (¶3). In FAS 13, such rent changes are to be included in the minimum rents based on the rate in effect at the inception of the lease, with variances up or down becoming contingent rents. (In EZLease v6.0 and later, contingent rent is called variable lease payments, in keeping with ASC 842/IFRS 16.)
3. Initial direct costs for a lessee in IAS 17 “are included as part of the amount recognised as an asset under the lease” (¶16).
4. A lease that transfers “substantially all the risks and rewards incident to ownership” (6) is called a capital lease by FAS 13, a finance lease by IAS 17.
5. The ownership transfer/bargain purchase option tests are identical. But FAS 13 uses two “bright line” tests for determining if a lease is capital: if the lease term is 75% or more of the economic life, and if the present value of the rents is 90% or more of the fair value. IAS 17 avoids bright lines, with the related tests being:
• ¶8(c): the lease term is for the major part of the economic life of the asset even if title is not transferred;
• ¶8(d): at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
6. IAS 17 adds a fifth test for a finance lease:
• ¶8(e): the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.
7. The present value of the rents in FAS 13 is determined using the lower of the implicit or incremental rates; in IAS 17, the implicit rate is always used if known.
8. For a lease that does not have ownership transfer/BPO, FAS 13 always depreciates over the lease term. IAS 17 depreciates over the shorter of the lease term or the useful life (though one would expect that the useful life would rarely be shorter than the lease term).
9. What FAS 13 calls “interest expense,” IAS 17 calls “finance charge” or “finance expense.”
10. Future rent disclosures for FAS 13 are by year for the first 5 years, then all remaining amounts. Such disclosures for IAS 17 are in three groups: the first year, years 2 through 5 inclusive, and beyond 5 years.
11. Sale-leaseback transactions of real estate may be disallowed by FAS 13 if there is “continuing involvement” between the parties (requiring the transaction to be treated instead as a financing). No such disallowance is discussed in IAS 17, though some of the issues may be implicitly covered by IAS 17’s general principle of treating transactions “in accordance with their substance and financial reality and not merely with legal form” (¶13).
12. The land and and building elements of a lease are considered separately for the purpose of lease classification, unless the land element is not material.
Adjusted use of EZLease
Use the System Option of Accounting Method: IFRS. In addition, make the modifications below, using the numbers below match the differences described above.
1. Use the IAS 17 definition to determine the proper incremental borrowing rate. However, see #7 below.
2. Exclude all contingent rent from the gross rent for a lease. Contingent rent of any sort should be shown (if you want EZLease to track it) in the Variable lease payments table.
3. Allow EZLease to calculate the regular right-of-use asset based on the rent, then choose Specified Right-of-use Asset and add the initial direct costs to what is already calculated.
4. EZLease uses U.S. terminology.
5. Since IAS 17 is principles-based rather than rules-based, you should review the automatic classification done by EZLease; you may need to manually set the classification of a lease (for instance, a lease whose present value of rents is 89% of the fair value of the asset may be most appropriately treated as finance under IAS 17). You may want to have EZLease automatically display the classification results for review when saving a lease. You can use the Classification Summary report to get a detail of the results of the lease term and present value tests; any adjustments are judgment calls which management needs to make in consultation with your auditors.
6. If your lease fits this criterion, set the Ownership Transfer flag.
7. If you know the unguaranteed residual, which will allow EZLease to calculate the implicit rate, fill it and the fair value in. EZLease will use the implicit rate if non-zero
8. If you have a lease with a shorter useful life than its term, change the Depreciation Life to Economic Life. EZLease will warn you that this is not normally appropriate, but allows you to confirm that it is correct.
9. EZLease uses U.S. terminology.
10. For your disclosure, combine years 2 through 5 of the future minimum rents report. You may find it easiest to do this by creating spreadsheet output and using Excel to sum the values.
11. This is a judgment call required of management in conjunction with auditors before entering a lease into EZLease.
12. If you have a lease with both land and building elements, separate it into two pieces and enter two lease records into EZLease. (The land portion will be operating unless there is an ownership transfer or bargain purchase option.)
EZLease has a more complete implementation of IFRS 16, so fewer manual adjustments are required.