The recognition of right-of-use assets with corresponding lease liabilities raises the question of whether and how the lease liabilities associated with the right-of-use assets should be considered when performing impairment assessments. In our view, the treatment of lease liabilities may differ in practice depending on whether the recoverable amount is based on the assets’ fair value less cost of disposal (FVLCD) or value in use (VIU).
In general, liabilities are ignored when performing an impairment test of a CGU, meaning that the starting point would be that both the carrying amount of the lease liabilities and the respective future lease payments would be ignored when determining the carrying amount and the recoverable amount of a CGU. However, there are exceptions to this general rule. This may occur if the disposal of a CGU would require the buyer to assume associated liabilities. In this case, the FVLCD of the CGU would be the sale price for both the CGU and the liabilities, less the cost of disposal. To perform a meaningful comparison, the carrying amount of the liabilities would then need to be deducted when determining both the carrying amount of the CGU and its VIU based on paragraph 78 of IAS 36.
When it comes to lease arrangements, in most cases, a CGU would be disposed of together with the associated lease arrangements. In such case, the FVLCD for the CGU would consider the associated lease arrangements and, therefore, the need to make the contractual lease payments. This would require the carrying amount of the lease liabilities to be deducted when determining the carrying amount of the CGU, in order to allow a meaningful comparison, and when determining the CGU’s VIU.
It is important to note that if the carrying amount of the lease liabilities is deducted to arrive at the carrying amount of the CGU, the same carrying amount of the lease liabilities would need to be deducted from the VIU. Under IAS 36.78, as confirmed by the IFRS Interpretations Committee at its March 2016 meeting, it is not appropriate to calculate the VIU by reducing the CGU’s future cash flows by the lease payments as distortion may arise due to the difference in the discount rate used to obtain the present value of the CGU’s future cash flows and the discount rate used to calculate the carrying amount of the lease liabilities. Treatment of lease liabilities
From a practical point of view, it may be sufficient to simply ignore lease liabilities and lease payments when determining the VIU and the carrying amount of the CGU. While this would mean that the VIU is not necessarily comparable to the FVLCD, this would not cause an issue as long as the calculated VIU is above the CGU’s carrying amount, and there is, therefore, evidence that the CGU is not impaired, in line with paragraph 19 of IAS 36. Treatment of lease liabilities
To illustrate this, consider a CGU consisting of the goodwill of 50, fixed assets of 320 and a right-of-use asset of 133, resulting in a total carrying amount of 503. The calculated VIU, ignoring lease cash outflows reflected in the lease liability of 140, is 524.
Since there is headroom of 21 in this case (recoverable amount of 524 less carrying amount of the CGU of 503), a comparison by the entity of the VIU and the carrying amount of the CGU, ignoring the lease liability, would be sufficient.
The lease liability in such case would not need to be deducted from the VIU nor the carrying amount of the CGU (gross basis). If the entity needs to compare the VIU with the FVLCD, based on a situation where the associated lease liability would be transferred to the buyer, the entity must determine the carrying amount of the CGU deducting the lease liability and must deduct the lease liability from the VIU as well (net basis). Under either basis, the headroom will be the same, in this example amounting to 21.
Consistency is an important principle in IAS 36. In testing for impairment, entities must ensure that the carrying amount of the CGU is consistent with the basis used for the recoverable amount.
In summary Treatment of lease liabilities
It may be sufficient to simply ignore lease liabilities and lease payments when determining both the carrying amount and VIU of the CGU. While this would mean that the VIU is not comparable to the FVLCD, it would be a reasonable shortcut as long as the calculated VIU is above the CGU’s carrying amount, providing evidence that the CGU is not impaired. Treatment of lease liabilities