Which of the following best describes the current practice in accounting for leases under GAAP and IFRS?

• A. Both GAAP and IFRS require lessees to recognize most leases on the balance sheet as a right-of-use asset and a lease liability.
• B. IFRS allows lessees to keep most leases off the balance sheet, while GAAP requires capitalization of all leases.
• C. Neither GAAP nor IFRS require lessees to recognize leases on the balance sheet.
• D. GAAP requires all leases to be treated as operating leases, while IFRS requires all leases to be treated as finance leases.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the context of the question. The problem is asking about the current accounting practices for leases under GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). These standards guide how companies report leases in their financial statements.
2. Step 2: Recall the key principles of lease accounting under GAAP and IFRS. Both standards have undergone significant changes in recent years, particularly with the introduction of ASC 842 (GAAP) and IFRS 16. These updates require lessees to recognize most leases on the balance sheet as a right-of-use asset and a lease liability.
3. Step 3: Analyze the options provided in the question. The correct answer should align with the current requirements under both GAAP and IFRS. For example, IFRS 16 and ASC 842 both emphasize capitalization of leases, meaning lessees must record most leases on the balance sheet.
4. Step 4: Eliminate incorrect options. For instance, the statement that IFRS allows lessees to keep most leases off the balance sheet is outdated and incorrect. Similarly, the claim that GAAP requires all leases to be treated as operating leases is not accurate under ASC 842.
5. Step 5: Confirm the correct answer. Based on the analysis, the correct description is that both GAAP and IFRS require lessees to recognize most leases on the balance sheet as a right-of-use asset and a lease liability. This reflects the current practice under ASC 842 and IFRS 16.