Impairment of Leased Assets and Right-of-Use Assets Explained
The recent changes in ASC 842 along with the Coronavirus pandemic have come together to unleash a plethora of chances in how leased assets are treated – not just for the lessee but for the lessor as well. One significant impact of the two happenings is that leases need to be recorded as a liability and a corresponding asset, and that companies hit hardest by the pandemic are starting to lease out their assets (respectively).
ASC 842’s changes about recording leases as an asset and a liability are also applicable on right-of-use assets (ROU assets), and will therefore be subject to the same impairment standards as set for other assets under ASC 360 (Property, Plant, and Equipment).
On top of that, once an organization starts adopting the new ASC 842 changes, they will have to cease the application of ASC 420 (Exit and Disposal Costs) to all their lease arrangements. Since losses can be recorded long before they actually occur, if an organization has put any liabilities in their books that reflect the standard, i.e., were recognized as exit/disposal costs with respect to a leased asset, it will have to be eliminated.
The preexisting liability will need to be adjusted with respect to the newly recognized right-of-use asset. Because of this, there is a major transition consideration to keep in mind with regards to impairment of leased assets and ROU assets.
Leased Asset Impairments That Were Previously Unrecorded May Need to Be Recognized
Assets are only recognized when listed on the balance sheet. Leased assets will have to adopt the same principle. A liability will have to be created with respect to the lease, while a corresponding leased asset will have to be recognized under ASC 360.
If an organization has any leased assets that weren’t previously recorded in this manner, it will have to be done upon adoption. In some cases, the organization will also have to recognize an impairment of asset that may have occurred before recognition.
If the carrying value of a long-lived leased asset is less than the impairment calculated, it would mean that the organization has not recognized the entire impairment value. When the transfer is made, the unrecognized portion of impairment should be recorded in such a manner that the ROU asset value exceeds its fair value.
If there is an offset, it can be recorded as a loss or as equity. In any case, the lease would still be recognized as an operating lease.
Furthermore, if there are any exit costs associated with the lease, it will be recorded as a lease expense – even if the organization decides to stop using a leased asset (unlike in the old ASC 842 provisions where the remaining fair value would be recorded as a liability under ASC 420). This is because variable payments won’t be considered when measuring the value of an ROU asset.
Instead of recording it as a negative lease asset, an organization should reduce the carrying about of this asset to zero and either derecognize it or carry the remaining balance forward.
Remembering all these provisions can prove to be difficult – not to mention the immense recalculation costs involved. If you’d like an easy way to handle your lease accounting needs, we recommend you give iLeasePro a go. Call us today to schedule a free demo!
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