An organization’s first responsibility is to be aware of potential impairment indicators, which occur when the carrying value of an asset may need to be permanently decreased in comparison to its fair value or recoverable amount. Click on the button below to open the document: Once the PDF opens, click on the Action button, which appears as a square icon with an upwards pointing arrow.
As discussed above, under IFRS the recoverability and the impairment of an asset (or CGU) are determined at the same time by comparing the carrying value of the asset (or CGU) to its recoverable amount. Depending on your organization’s industry, the coronavirus pandemic may have significant impacts on 2020 financial reporting considerations. In either instance, however, the current global economic situation warrants further look at long-lived assets as several indicators to possible impairment exist. If a space or equipment is being used less or not at all, options include closing a location, reducing the production of a product line, or decreasing the amount of space being used for a particular activity. Start adding content to your list by clicking on the star icon included in each card, Accounting guide To qualify as identified, the asset must be physically distinct or the lessee must receive substantially all of the capacity of the asset. Regardless of whether or not a company anticipates an impairment of its assets, a preliminary review of economic indicators to evaluate any potential impairment and analysis of recoverability is something companies should consider performing in the first half of 2020. Regardless of what information a company uses to analyze the recoverability of an asset group, documentation of the analysis and reasoning is imperative.
For some, these impacts were felt before the end of the first quarter and for others, it may have taken longer. Going forward under ASC 842, both classifications of leases, operating and finance, will be capitalized on the balance sheet. When calculating the VIU, the discount rate used should reflect the time value of money and the risk premium associated with the asset. IFRS uses a similar approach to identifying the asset (or asset group). The lease liability is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, the company’s incremental borrowing rate (IBR). There are several details that need to be determined to perform the recoverability test under ASC 360. © 2020 LeaseAccelerator, Inc. A company must analyze assets for recoverability at the lowest level cash flows are identifiable. + Your email address will not be published. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. The lessee must have the right to direct the use of the asset. EY’s Technical Line on year-end reminders for accounting and disclosure requirements under ASC 842 outlines suggested areas of focus for the first 10K. Listen to our lease accounting podcast series for top answers and insights. This guide was partially updated in November 2019. SEC COMMENT LETTERS - ASC 842 LEASE ACCOUNTING AND DISCLOSURES 2 EXECUTIVE SUMMARY THE FIRST YEAR OF ADOPTION FOR TOPIC 842, LEASES This report contains LeaseAccelerator’s study of Securities and Exchange Commission (SEC) staff comments issued for the new lease standard, Leases (Topic 842) also known as ASC 842, in the first 10 months of 2019. ASC 360 defines an asset group as long-lived assets separated into “the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.”. Determining whether a leased asset’s value needs to be analyzed further requires reviewing several factors. In accounting, an impairment loss occurs when the cash flows expected to be generated from an asset over its useful life can no longer support the carrying value of that asset. However, assessing recoverability is not as black and white. The new FASB and IFRS lease accounting standards (ASC 842 and IFRS 16) will take effect in 2019 for public companies and in 2021 for private companies. In this instance, the leased kitchen equipment for making the pizzas is being used and may not be impaired. This guide was partially updated in November 2019. }, LeaseQuery, LLC ASC 842 represents a significant overhaul of the accounting treatment for leases, with the most significant change being that most leases, including most operating leases, are now capitalized on the balance sheet. Deloitte’s Lessons Learned from Public Company Implementations covers five critical lessons private companies should be aware of for their ASC 842 projects. The future cash flows are not discounted during this analysis because the aim is not to assess the fair value of the assets or the net present value of the cash flows, but whether the asset group will generate cash greater than its carrying value. ASC 842 addresses this type of payment in the excerpts shown below. .hide-if-no-js {
Again, FASB recognizes that judgment may need to be applied by organizations to determine the cash flows attributable to a specific asset group. 02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Organizations are examining the major impact the coronavirus pandemic is having on their business. In the case of a product line or regional business, the company needs to identify the fair value of the lowest group of assets to which a cash flow value may be assigned. Copyright 2000-2020 LeaseAccelerator, Inc. All rights reserved. Once you’ve determined there’s an indication of impairment, ASC 360 Property, Plant, and Equipment (ASC 360) specifies these steps to be completed in the calculation of an impairment: Similarly, IAS 36 Impairment of Assets (IAS 36) identifies how to calculate and record impairments of long-lived assets. Additionally, ASC 842 looks at operating leases as operating liabilities.
Under ASC 360 when the carrying value of an asset group is not deemed to be recoverable, it is typically impaired. ASC 842-20-35-9 states ROU assets will need to be considered for impairment in accordance with ASC 360-10-35. It does not impact the lease liability, because the key money has already been paid. Under IFRS 16’s single-model approach to lease accounting, for all lessees, the lease arrangements are classified as finance leases, and therefore the lease liabilities are excluded from the analysis. COVID-19’s impact on lease accounting. The adoption of ASC 842 for public companies and IFRS 16 for international companies resulted in lease liabilities and ROU assets being recorded on an organization’s books for nearly all leases. Analysis during this period may be as simple as recognizing the presence of impairment indicators due to COVID-19 and using a high-level analysis to show no impairment because the reduction in cash flows is temporary for the business. During this period of global uncertainty, whether an organization is large or small, public or private, the following may be topics for consideration: This article will discuss the impairment considerations for long-lived assets, with focus on lease assets under US GAAP and IFRS. 9 Once you determine that impairment indicators exist for a specific asset (or asset group), you compare the carrying value of the asset (or asset group) to its recoverable amount. Will I need to impair my assets due to COVID-19? IAS 36 uses the term cash-generating unit (CGU) but the concept is largely the same. Generally, a debt agreement is entered into for the organization as a whole and secured by all the assets of a company, not a specific product or regional business. If impairment indicators are present, the carrying value of the asset is compared to its recoverable amount. An asset is analyzed as either a specific asset, an asset class, or an asset group. 1. Do you need CPE credit? A chain of leased hotels impacted by self-quarantine can make the following case for certain assets: the current conditions are temporary and they expect to resume business as usual such that future cash flows over the life of the leased buildings exceed their carrying value. Once an organization has made the decision to include or exclude an operating liability in a leased asset evaluation, they must document and apply that decision consistently across the company. Your #1 Resource for Lease Accounting News & Information. Now let’s examine businesses in the travel industry. An individual asset cannot be reviewed for recoverability if it is not able to generate cash inflow independently of other assets, and therefore a CGU is the lowest level at which cash inflows are generated. An organization will still need to review financial results, operations, and sustainability to make an accurate assessment of whether or not leased assets need to be analyzed for impairment. With finance leases, the expense profile is typically front-loaded due to the separate interest on the lease liability. Calendar-year private companies are required to transition to ASC 842 by January 1, 2021. There are a few exceptions, such as certain short-term leases less than or equal to 12 months in duration. Our Leases guide addresses the accounting for leases under US GAAP. Key money and ASC 842. Your email address will not be published. However, in most cases a right-of-use (ROU) asset will be recognized on the balance sheet along with a corresponding liability for the lease obligation.
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