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Under ASC 840, capital leases were recorded on a company’s balance sheet, but operating leases were not. In addition, the lessor cannot have substantive rights to substitute the asset. Determining whether a leased asset’s value needs to be analyzed further requires reviewing several factors. Suite P7 However, in the current economic environment, it would be appropriate to understand if any changes to the forecast have been incorporated as a result of the economic events of the COVID-19. Conversely, the initial assessment may show additional analysis is required to know whether or not an asset should be impaired. four 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. However, assessing recoverability is not as black and white. If financial results and operations have decreased for a specific product line, location, or business, that organization should also review sustainability and consider future plans specific to the affected asset group. 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. Companies using a checklist of items to analyze during an economic downturn created in previous years need to include ROU assets recorded under the new lease accounting guidance. Further, you should expect that your auditors may want to see an impairment analysis of your long-lived assets, including any ROU assets. Do you need CPE credit? The ASC 842 standard closes a major accounting loophole in ASC 840: off-balance sheet operating leases. Organizations are examining the major impact the coronavirus pandemic is having on their business. As part of their quarterly and annual financial reporting processes, organizations with long-lived assets must have internal controls in place to monitor impairment indicators. Browse our library of on-demand CPE programs. It does not impact the lease liability, because the key money has already been paid. Impairments are applicable to both tangible and intangible assets including property, plant, equipment, goodwill, software, or right-of-use (ROU) assets. Under US GAAP, once you have reviewed the current economic and operational circumstances to determine that an impairment may be triggered in your asset (or asset group), you must perform the recoverability test specified by ASC 360-10-35-17 to determine whether impairment analysis is required. An asset is analyzed as either a specific asset, an asset class, or an asset group. The most significant impact of the new leases standard is that lessees will recognize both a lease liability and a related asset on their balance sheet for virtually all leases.This right-of-use asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, that is applied to other property, plant, and equipment. The FASB has been assisting stakeholders with … Calendar-year private companies are required to transition to ASC 842 by January 1, 2021. The decisions a company makes regarding key inputs to the recoverability testing of an asset group need to be consistent within the company and documented. by business segment, product, location, or geographic area) to assist with identifying CGUs. + 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. display: none !important;
Accounting Standards Codification Topic 842, also known as ASC 842 and as ASU 2016-02, is the latest lease accounting standard published by the Financial Accounting Standards Board (FASB). If your assessment shows that the asset group is unable to generate enough undiscounted cash flows over its remaining useful life to cover its net book value, it needs to be impaired to the fair value of the asset. In contrast, situations in other regions could potentially result in some locations remaining closed and the company will need to consider if impairment is necessary.
ASC 842 still classifies leases as either finance leases (called capital leases under ASC 840) or operating leases. However, under IFRS, impairments are able to be reversed or partially reduced, if certain criteria are met. ASC 360-10-35-21 and IAS 36 paragraph 12 provide some examples of internal and external changes in events or circumstances that might drive an evaluation of impairment. The appropriate discount rate can also be estimated by looking at the weighted average cost of capital for an asset (or CGU) that has a similar set of facts, in terms of service potential and risks, to the asset (or CGU) being reviewed. The majority of companies are facing indicators that the economy and possibly their businesses are or will be negatively impacted by the coronavirus pandemic. ASC 842 addresses this type of payment in the excerpts shown below.
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Lease Accounting.com is an industry-focused website providing news and information curated from standards boards, industry associations, accounting firms and technology vendors for up-to-date resources in one place. However, as stated above, the FASB does not wish for the results of the recoverability test to be impacted by a company’s financing decisions.
carrying value) of the asset (or asset group).
However, the dining space is not being used. The treatment of operating and finance leases will differ on the income statement under the new ASC 842 standard. It replaced the previous US GAAP leasing standard, ASC 840, which was almost 40 years old. The amount of the impairment loss is calculated as the difference between the carrying value and the recoverable amount and is also recorded as a debit to impairment loss and a credit to the asset’s carrying value. 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. 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. The affected companies first transitioned to and reported under the new lease accounting standards during 2019, and 2020 is the first year of steady-state. Now that we have discussed some of the inclusions and exclusions for cash flows, let’s tackle the applicable discount rate.
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