Which lease agreements fall under Local GAAP – and how are they accounted for?
How a lease agreement is accounted for depends on the type of lease and the accounting framework applied. Under Local GAAP, it is primarily finance leases that are recognised on the balance sheet, while operating leases are disclosed in the notes. Below, we explain what applies and how the treatment under Local GAAP contrasts with IFRS 16.
Why finance leases are included on the balance sheet
Under Local GAAP, finance leases are primarily reported on the balance sheet. The reason is that these agreements, in substance, operate in a manner similar to an instalment purchase. The company generally intends to retain the leased asset at the end of the lease term, and the periodic payments can therefore be viewed as a form of financing.
Operating leases: key differences between Local GAAP and IFRS 16
The key difference between Local GAAP and IFRS 16 lies in the treatment of operating leases. Under Local GAAP, operating leases remain off balance sheet and are not recognised as assets and liabilities. Under IFRS 16, by contrast, operating leases are brought onto the balance sheet. That said, operating leases are not ignored under Local GAAP. Companies are still required to disclose their future lease commitments in the notes to the financial statements. This provides transparency regarding future cash outflows, even though no corresponding asset or liability is recorded on the balance sheet.