Impairment of right-of-use assets

Impairment of right-of-use assets explains the lease assets now on the balance sheet and as a result also susceptible of impairment risks to be accounted for. Impairment of right-of-use assets

In IFRS 16, lessees must record a right-of-use asset and a lease liability for all lease arrangements in their statement of financial position. Under IFRS 16, these ‘new’ right-of-use assets will be subject to the impairment requirements of IAS 36. Impairment of right-of-use assetsImpairment of right-of-use assets

When to test for impairment? Impairment of right-of-use assets

Similar to other assets, a right-of-use-asset will only be tested for impairment when impairment indicators exist. If impairment indicators exist, an entity must determine whether the right-of-use-asset can be tested on a stand-alone basis or whether it will have to be tested at a Cash Generating Unit level (GCU-level). This will depend on whether the right-of-use-asset generates largely independent cash inflows from other assets or groups of assets.

Leased investment property

While there may be instances where leased assets generate largely independent cash inflows, an example would be a leased investment property, many leased assets will be used by an entity as an input in its main operating activities whether these are service-providing or production-of-goods related. It is therefore likely that many right-of-use-assets will be assessed for impairment at a CGU-level rather than at an individual asset level. Impairment of right-of-use assets

Even if there are no impairment indicators at the right-of-use-asset level or the respective CGU-level, right-of-use-assets will impact the annual goodwill impairment test by increasing the carrying amount of the CGU, or group of CGUs, at which goodwill is assessed for impairment. Impairment of right-of-use assets

In summary

There will be situations in practice where right-of-use-assets generate largely independent cash inflows and will be required to be tested on a stand-alone basis. This will depend on the actual facts and circumstances and may require significant judgment.

In many situations, the leased assets and, therefore, the right-of-use assets will not generate largely independent cash inflows. It will be necessary to determine the CGU to which the right-of-use assets belong and to perform the impairment test at that level.

Cash generating unit

An asset’s CGU is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. IAS 36 contains detailed guidance and examples on the determination of the CGUs. The example below aims to illustrate the CGU application to leasing arrangements in the lessee’s financial statements.

CGU identification

Background Retail store chain M entered into the following three leases:

  • Lease for ground floor in building A: used for M’s store X, leasehold improvements were made at the beginning of the lease;
  • Lease for the second floor in building B: originally it was planned that space would be utilized for the payroll department, but then it was sub-let to a law firm;
  • Lease for two floors in building C: used for M’s HR and marketing department.

Store X makes all its retail purchases through M’s purchasing center. Pricing, marketing, advertising, and human resources policies (except for hiring X’s cashiers and sales staff) are decided by M. M also owns five other stores in the same city as X (although in different neighborhoods) and 20 other stores in other cities. All stores are managed in the same way as X.

What are the cash-generating units and at which level are the leased floors and therefore the right-of-use-assets assessed for impairment?

Analysis

In identifying cash-generating units for the stores, M considers whether, for example:

(a) Internal management reporting is organized to measure performance on a store-by-store basis;

(b) The business is run on a store-by-store profit basis or on a region/city basis.

All of M’s stores are in different neighborhoods and were determined to have different customer bases. Although X is managed at a corporate level, X generates cash inflows that are largely independent of those of M’s other stores. Therefore, store X is a separate cash-generating unit. The leased ground floor of building A is used for retail store X and does not generate largely independent cash inflows. The right-of-use-asset in relation to the ground floor in building A is assessed for impairment at the store X CGU-level.

The second floor of building B is sub-let to a law firm. Due to the sub-lease, the right-of-use-asset generates largely independent cash inflows and must be assessed for impairment on a stand-alone basis.

The two floors leased in building C are used for marketing and human resources corporate functions. The right-of-use-asset in relation to these floors is a corporate asset and is allocated on a reasonable and consistent basis to the CGUs to which it relates.

In addition, retail chain M assesses goodwill for impairment on a country-by-country basis. The group of CGUs underpinning the goodwill impairment test on a country basis consists of all stores in the relevant country, including any right-of-use assets in relation to these stores, together with any allocated corporate assets, including any right-of-use corporate assets.

See also: The IFRS Foundation

Impairment of right-of-use assets

Impairment of right-of-use assets Impairment of right-of-use assets

Impairment of right-of-use assets Impairment of right-of-use assets

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