Explained: The Scope of ASC 842 and IFRS 16

Which aspects of lease accounting have changed? Get a high-level overview to see:

  • Which leases are covered under the new standards
  • Exceptions to the new guidance
  • New concepts that you need to know


George Azih:

When it comes to the scope of the lease accounting standards, the good news is everything that’s a lease today, will be a lease under the new lease accounting standards. So, leases of assets, sale leasebacks, subleases, in-substance purchase/sales, leases of inventory, there are some exceptions, and we’ll go over those in next month’s presentation because believe it or not, there is a subtle, but very important difference, between the definition of a lease under today’s guidance and a definition of a lease under the new lease accounting standards, under 842. There’s a subtle but very important difference. There are some instances where things that are considered leases today, may not be considered leases tomorrow, and we’ll go over that as I mentioned in next month’s, June’s, webinar.

Now, there are some items that are within scope of 842, but have some exceptions. For instance, leases with service components. You’ve heard of the whole idea now about lease components and non-lease components, that is a new concept under the new lease accounting standard, under 842 and IFRS. You have the thing called components. Under current guidance, i.e. under 840, what we are have are what are called exutory costs. Basically, CAM, tax, insurance, those are executory costs and you exclude those from your present value and your minimum lease payments, that nomenclature has been jettisoned. There’s no such thing as executory costs under 842, that has been replaced with lease components and non-lease components.

Also, as I mentioned, short term leases, less than or equal to 12 months, and then outside of scope, leases of intangibles, other than right of use assets, obviously, natural resources. So, for instance, timber, biological assets, those do not count.