Operating vs Finance Leases After IFRS 16 and ASC 842

Before 2019, a company could lease a fleet of stores or aircraft for decades and show none of it on the balance sheet — an "operating lease" was just a footnote. Both major accounting regimes closed that gap: virtually every lease longer than 12 months now creates a right-of-use asset and a matching lease liability on the balance sheet. What survives, and still trips people up, is that the two regimes handle the income statement differently.

Two income-statement patterns, one balance sheet

IFRS 16 collapses the old operating/finance distinction: every lease is capitalized and run through the income statement as depreciation of the right-of-use asset plus interest on the lease liability — the same pattern a purchased asset financed with debt would show. Because interest is front-loaded (it's charged on the outstanding liability, which is largest early on), total lease expense is higher in early years and lower in later years, even though cash payments are flat.

US GAAP (ASC 842) still splits leases into two types for the income statement, even though both sit on the balance sheet. A finance lease looks like the IFRS 16 pattern above. An operating lease — the far more common case for real estate and equipment — recognizes a single lease expense, straight-lined over the term so it matches the flat cash payment every period, even though under the hood it's still amortizing an asset and accreting a liability at slightly different paces that happen to net out to a flat number.

Worked example

A US retailer signs a 10-year store lease at $10m per year, classified as an operating lease under ASC 842. The income statement shows a flat $10m "lease expense" every year for ten years. A sister subsidiary reporting under IFRS 16 has an economically identical lease, but it books depreciation of the right-of-use asset (roughly straight-line, $8m/year assuming a small residual) plus interest on the lease liability that starts around $3m and shrinks to under $1m by year 10 — combined expense starts near $11m and ends near $8.5m, front-loaded, even though both subsidiaries wrote the same $10m check each year.

What this means in practice

This matters for anyone comparing EBITDA or operating margin across a US GAAP filer and an IFRS filer with similar lease books: the IFRS 16 finance-style pattern pushes lease cost below the operating line (into interest and D&A), inflating EBITDA relative to the US GAAP operating-lease treatment, which keeps the full expense in operating costs. Adjusted EBITDA that adds back IFRS 16 lease costs but not the US peer's flat operating-lease expense is comparing apples to oranges.